Inflation numbers (at 7%) are still very much out of RBI’s comfort zone (of 5%) and show no signs of relenting. While the banking system is once again flooded with surplus cash flows, price levels too are rising to newer highs. CRR (Cash reserver ratio) hike seems to be next on the cards. This would help to reduce liquidity in the markets and hopefully in the process, lower inflation rates. Bad news for investors and retailers .. Stock markets may tumble further due to this news and the eventual liquidity crunch.

Banks on Friday parked surplus funds worth Rs 37,000 crore with the RBI at the daily reverse repo window. On the other hand, the wholesale price index (WPI) accelerated to 7% in the 12 months ended March 22, 2008, sharply higher than the previous week’s 6.68%. Given that inflation figures have risen further this week ( to 7% ), it has increased chances of a rate hike.

A senior bond dealer with a private sector bank said, “With inflation rising to 7%, the probability of the central bank taking monetary measures has gone up considerably. There is a strong case for RBI to take immediate action, even though it might prefer to wait till the policy statement. There are two options with the central bank: raising CRR or tinkering with repo and reverse repo rates.”

Market participants feel it would be better if RBI adopts a wait-and-watch stance to see the measures adopted by Centre to combat inflation. Again, if key rates are hiked, it would widen the corridor and give way for more foreign fund inflows, putting pressure on the rupee to rise against the dollar.