The Reserve Bank of India (RBI) often likes to spring a small surprise, and today’s meeting was no exception. Contrary to market expectations, the RBI raised the CRR by 75bps v/s expectations of 50bps. RBI has raised its growth estimate for FY10 from
6% with an upward bias, to 7.5%.

The RBI raised its inflation projection, it has stated that inflation expectations are on the rise and warned of further upside risks emanating from: oil, below average monsoons in 2010, and capital flows. RBI also pointed out that large fiscal deficit is a far bigger risk to both short-term and medium-term. The reversal of monetary accommodation cannot be effective unless there is a roll back of government borrowing.

Citi Analysts said,

Going forward, we maintain our view that the RBI will hike policy rates by at least 125bps and the CRR by an additional 50bp-100 bps depending on liquidity conditions.

Morgan Stanley Analysts said,

In our view, the direct impact of this move is that NIMs for banks will be impacted by about 5 bps, implying a F2011 earnings impact of 3-4% for banks in our coverage (assuming all else is equal). The RBI move is likely to cause short rates in India to start moving up, in our view.

HSBC Analysts expect 125bp of CRR hikes and the same increase in both the repo and reverse repo rates by end of 2010.