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Another rate hike likely as March inflation shoots up to 8.98%

Contradicting all the projection of the central bank and government, headline inflation in March shot up to 8.98% as against February 8.31%.

Contradicting all the projection of the central bank and government, headline inflation in March shot up to 8.98% as against February 8.31%. These figures are above the apex bank's forecast of 8%. Market experts believe that inflation figures jumped due to the fears that the Reserve Bank of India (RBI) can once again hike key rates in its policy review next month.

Industry expects another 25 basis points, or 0.25 percentage points, jump in the repo and reverse repo rates. The repo rate is the rate at which banks borrow from the RBI and the reverse-repo rate is the rate at which banks park money with the apex bank.

Alex Mathews, head of research at Geojit BNP Paribas Financial Services, says, "At present, the global market is suffering from the price hike. In the domestic front, government will take all the necessary steps to lower the inflation to around 7% in the next couple of quarters. We can see 25 basis points hike in the key rates in the next policy review."

Jay Shankar, chief economist at Religare Capital Markets, says, "The RBI cannot afford to remain oblivious of inflation-growth conundrum anymore and must tighten aggressively on May 3." The average inflation for 2010-11 stood at 9.2% year on year The soaring inflation can hurt interest sensitive stocks. During 2010-11 the BSE Bankex gained around 24% to 13,299.77 and the BSE Realty index tumbled 6.06% to 8175.89.

Among realty majors, DLF and Unitech retreated 13.50% and 44.89% to Rs 267.20 and Rs 40.45 respectively, in 2010-11. However, banking major such as ICICI Bank and HDFC Bank gained 16.79% and 21.23% to Rs 1,112.75 and Rs 2,342.95, respectively, during the same period.

"Soaring inflation can affect rate sensitive real estate and banking stocks," Mathews added.