With crucial polls ahead, India's central bank may not be done yet with monetary tightening For the second time in six weeks, the Monetary Policy Committee of the RBI raised its key policy rate, the repo rate, by 25 basis points, to 6.5 per cent this time, with five of its six members voting in favour. A rate hike had appeared inevitable with the rise in headline inflation from 4.6 per cent in June, an uptick in household inflation expectations, both from a near term and one year horizon, captured by the RBI's survey and the risk of future inflation after the government's decision to increase MSPs for kharif crops for the 2018 19 sowing season, and fiscal slippages. The MPC reckons that the higher MSP, which is larger than the average increase in the last few years, could have a direct impact on food inflation and second round effects on headline inflation though much will hinge on the level of procurement. The other concern relates to volatile crude oil prices and fiscal slippages both at the federal and state levels. For the central bank, which is legally mandated to maintain inflation at close to the 4 per cent mark, the primary objective would be to meet that goal. Not raising rates wasn't really an option considering the possible dent to its institutional credibility and the fact that the benchmark yield on 10 year bonds is now close to 8 per cent and the yield differential between the one year and 10 year bond is already high at over 75 basis points. Not that the 25 basis points increase in rates will make a significant difference given the directional shift. That is reflected, for instance, in market leader SBI increasing its rates on its term deposits and lower bond issuances.