Interest rates may go further up, and energy prices might continue to be at the high levels which they are at presently. This was the basis of the speech made by Reserve Bank of India governor, Y V Reddy in Pune on Monday. The governor further indicated to the financial markets that Reserve Bank of India (RBI) would definitely move towards further monetary tightening to control inflation.

Reddy spoke about the roles of the government and the RBI, saying that the government has taken measures to control prices by managing the supply of products and RBI will play its part in moderating and managing demand so that pressures on prices do not intensify.

“His stance was already hawkish. At least this year, rates are only going to go up,” said DK Joshi, principal economist, CRISIL. Joshi also said the governor had indicated in his speech on the need to curb the rising demand which is further adding to the problem of inflation. By calling upon financial market participants to participate in RBI’s demand curbing exercise, the central bank has also probably hinted that bank should keep their interest rates moving in tandem with RBI, he added.

Till now, the banks have followed the RBI’s lead in altering interest rates. After the central bank increased the repo rate by 25 basis points, from 7.75 per cent to 8.00 per cent on June 11, most banks revised their lending and deposit rates. Repo rate is the rate at which RBI lends money to banks. There is also an expectation that there might be a further hike in the repo rate, in addition to a 50 basis point hike in cash reserve ratio (the money banks have to keep with RBI on its deposits), from 8.25 per cent to 8.75 per cent.