The RBI raised the key lending rate by 25 basis points to 8 per cent, while it left the cash reserve ratio unchanged at 4 per cent, saying the hike is needed to "set the economy securely on the recommended disinflationary path".
British brokerage HSBC said "the RBI is aptly concerned about the much too high and sticky core inflation reading. While it indicated that rates would be on hold in near term, we do not believe that this is the end of the tightening cycle. Further tightening is needed, in our view, to bring core inflation firmly under control."
Kotak Mahindra Bank too supported this view saying "even though today's policy decision was a bit of a surprise, the sense from the RBI is that there continues to be risk to the inflation dynamics on the upside, even after today's policy decision."
"There appears no chance for any rate reduction in the immediate future (at least in the first half of CY14), while further rate increases may not be totally ruled out, it said.
HDFC Bank said that the RBI move is unexpected and belied its own previous indication on December 18 that if inflation pressures moderate it could reduce the need to tighten monetary policy.
Rating agency Care said the rate hike indicates the RBI has clearly targeted CPI inflation as the variable to look out for. "We do not expect any change in rates in the next policy review (in April) as the 8 per cent threshold for CPI inflation is unlikely to be met by then."
Dion Global Solutions Ltd.