The Reserve Bank of India (RBI), as expected, today lifted both the repo rate and reverse repo rate by 25bp. However, inflation will probably slow soon and the RBI is increasingly concerned about high capital inflows and rupee appreciation. In addition, the repo rate has now been lifted into a “neutral” range. Accordingly, we expect only one more 25bp rate hike, with this move coming in early 2011 rather than later this year. The government bond market sell-off is probably over.
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