The Reserve Bank of India, or RBI, has moved yet again in its ongoing fight against rising inflation, reports CNBC-TV18. It has hiked the Cash Reserve Ratio, or CRR, which is the portion of deposits that banks need to keep as cash with the central bank, by a steep 50 basis points.

This hike will take effect in two stages. First, a 25 basis point hike on July 5, and another 25 basis point hike on July 19. By July 19, CRR will stand at 8.75%.

It has also hiked the repo rate by 50 basis points, which will be effective immediately.

The central bank said there has been a turnaround in production of durables. "Consumption demand seems to be reviving." 

The rise in non-oil imports reflects domestic demand pressure, it said. "Aggregate demand pressures are strongly in evidence. The priority now is to eschew the build-up in inflation pressures."

So, what do experts read into the rate hike?

Keki Mistry, Vice-Chairman and MD,  HDFC, said the dual rate hike is an extreme measure. "People were expecting RBI to act due to the high inflation figures."

MD Mallya, CMD, Bank of Baroda, said the CRR and repo rate hikes were on expected lines. "The inflation number has been a concern. With inflation reaching double-digit figures, perhaps the move that RBI has now taken was expected."

Nitin Jain, MD and CEO, ICICI Securities, said the rate hike came as a surprise. "The Governor's statement of a calibrated move was interpreted as meaning a 25 bps hike rather than a 50 bps. But the market was trying to discount an 8.5% repo rate, whether in two moves or one move."

Raamdeo Agrawal, MD, Motilal Oswal, said he was surprised that both the rate hikes came together. "However, expectations of a rate hike were built-in."

How will bond and stock markets react?

Udayan Mukherjee, Executive Editor, CNBC-TV18, said the rate hike is terrible news for the markets though it was not totally unexpected. "It would no go down well with the stock markets, which would have seen it coming ever since the inflation numbers came in. Investors knew there would be some kind of rate tightening. Dr YV Reddy's comments might have misled the market a bit. It seemed to soothe the nerves of a lot of market participants that something immediate may not happen. But not only has it happened within 48 hours of the statement, the quantum will not go down well with the market at all. A 50 bps CRR and repo hike is far more than what most market participants expected. The last time the repo rate hike came in, the market actually turned around a bit because the news was not entirely unexpected. This time, we are looking at a sell-off in interest rate sensitives and probably in the stock market tomorrow morning."

According to I-Secs' Nitin Jain, bond markets will definitely respond negatively. "The 10-year benchmark yield is expected to move into the 8.75-9% band. Long-term bond yields will probably cross the 9.5% level and remain there till some clarity about the Policy emerges."

According to Motilal Oswal's Raamdeo Agrawal, the markets could open with some kind of downward gap. "The bulk of the shock is already absorbed in. With rising interest rates, stocks are going to trade at lower PE multiples. But it is too early to say whether it is going to impact earnings."

What does the industry read into the rate hike?

Sheshagiri Rao, Director-Finance, JSW, said a 50 bps hike was quite steep. "It will have a major impact for the industry as it will remove liquidity from the market. It will suck away liquidity in the market. On one side, liquidity is getting ground away by way of the exchange rate, where a lot of dollars are being sold and is being sucked away. Again, a CRR hike will take away further liquidity. Advance taxes have also taken away liquidity. So, there is going to be huge liquidity pressures going forward. The repo rate hike will lead to further hikes in interest rates and is not good at all for the industry."