Expect RBI to hike rate by 25 bps: Experts

Bond yields have also cooled down a bit this morning after yesterday’s inflation numbers; they had run up in a hurry to more than 9.5% but now it is down to 9.11%, so it has cooled down a bit.

Hitendra Dave of HSBC expects cyclical rallies in bond market and the yields will remain high at 9.5%. He does not see inflation easing off as yet. The Reserve Bank of India, or the RBI will not keep the status quo and will hike rates by 25 bps which is already factored in. 

A Prasanna of ICICI Securities feels that the inflation is likely to rise & peak at 13%. The RBI has no choice but to hike rates, he added. He expects a 25-50 bps hike in rates.

Excerpts from CNBC-TV18's exclusive interview with Hitendra Dave and A Prasanna:

Q: What did you make of the numbers and can you say with any degree of confidence that inflation is peaking off?

Dave: What has happened over the last few weeks is inflation has come significantly above analysts' and economists' expectations, so in one sense the fact that yesterday it has come in a little lower it is a bit of relief for the market. But I think it would be too early to jump to the conclusion that the underlying inflationary trends or pressures have started easing off. Some of the details are quite positive, but I think we will have to wait and watch over the next few weeks to see whether that is a trend or it is just a one of.

Q: Bond yields were quite manic last week. Do you think the nervousness was getting over done or do you think we are headed to that 9.5% mark sooner than later?

Dave: As far as bond markets are concerned, one would have to work on the presumption that with inflation, you will have these technical or cyclical rallies, but in the environment that we are right now most people would come to the conclusion that the Reserve Bank of India (RBI) is very much focused on containing inflation. While at the same time trying to balance the impact it can have on growth. But net-net, I think bond yields at 9.5% most people would be of the view that it is more likely to be back at 9.5% rather than slip below 9%.

Q: It is still 11.9% and the problem is also the kind of retrospective upping that is there in inflation targets. What are you factoring in by way of RBI action, when the monetary policy happens?

Prasanna: On inflation per se, I agree that yesterday’s number was a bit positive in the sense that the week on week increase was a bit less than the last few weeks. Having said that, we still think that headline inflation will be about 12% for the next three to four months and probably peak around 13%. In this kind of a scenario, I think RBI has no option but to tighten policy further.

However, crude prices fundamentally have gone to an unsustainable level and we are seeing a reaction to that. So taking that into account, I guess that it is a toss up between 25-50 bps hike in the repo rate and I think it is a bit close to call at this point of time.

Q: What do you think - will the RBI move at all and secondly, if they do, by how much and through what instrument do you reckon on the 29?

Dave: The likelihood of no action I would assign a very low probability, so it is certainly going to be a hike now; whether it is a 25 bps or 50 bps will depend on maybe the next two weeks' inflation details. Also I suppose there is this growing sense that - I am sure there will be an attempt to collect evidence whether projects are being deferred, investments are being cancelled or postponed, is funding availability for the infrastructure sector becoming a big bottleneck, all those sectors will wade in. But at this juncture, I would agree with Mr Prasanna that it is a close call between 25-50, my own sense is it will be 25 bps.

Q: If that were to happen, what kind of a reaction would you expect to see from the bond market?

Dave: For the most part, I would think 25 bps has certainly been factored in, so it will depend on the kind of qualitative statements that a company forecasts on inflation, on growth, on other concerns they express, whether it looks like a 25 bps with further hikes depending on incoming data, or it is a 50 bps. Does it indicate a pause or are they indicating that even now there could be further actions, but if it is 25 bps, one would expect depending on the market condition at that stage possibly it is a bit of a relief rally.