HSBC expects RBI to hold rates till July 29 meet

Hitendra Dave, Co-Head Global Markets, HSBC, does not expect the Reserve Bank of India to raise rates between now and the July 29 Monetary Policy. "Having taken measures just 10 days back and with the policy meeting scheduled towards the end of the month, the probability of further action between now and July 29 is quite low."

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

Q: Where do you see interest rates headed?  

A: In its last announcement, the RBI mentioned that they would be watching for underlying trends and pressures and this would seem to indicate that all the measures taken in March and April, will clearly have not had the desired effect.

So, if inflation is going to increase at close to this rate or 50% of this rate, interest rates will go higher and liquidity will remain very tight.

Q: What is the immediate impact? We are already seeing the 10-year at about 8.99% or nearly 9%. What is the guess about the auction?  

A:  For some time, it has been spoken in the market that the 10-year bond deal has a bit of a kink about it. It was the only thing which was trading below 9% while the rest of the market was well above 9%. So, this auction will go a long way in correcting that kink. The fair level in any case would have been closer to 9.10% or 9.15%. Most of the market would think of that as a normalized level and incorporate the current inflation data and bid accordingly.

But the current levels in the eyes of most market participants are not the fair 10-year bond level.

Q: Does this level factor in anything by way of further RBI action on July 9 or earlier? What you are expecting from the RBI on or before July 29? Where will you see the 10-year yield by the end of the month?

A: The main case scenario from the market perspective would be that having taken measures just 10 days back or so and with the policy meeting scheduled towards the end of the month, the probability of further action between now and July 29 is quite low. Given the kind of inflationary trend that we have seen even after the measures have been taken, the pressure on the RBI to continue to add and act decisively to anchor inflation expectation would be very high.

If all these reported comments about inflation hitting 13% in the next few weeks or months is true, then any monetary policy authority would be under a lot of pressure to demonstrate decisively that they will do everything possible to anchor the inflation expectations. 

Q: Are you expecting another double dose of CRR and Repo? If that is the case, that is the crucial point, where do you see the 10-year yield curve? 

A: At this juncture, most people would expect in due course of time further hike in repo rates. From what it is at 8.5% today, between now and the year-end, the number of around 9% is what most people would be working with and then see how the data evolves. Around 9.30% to 9.50% is my estimate for the 10-year bond yield.

Q: The rupee has just strengthened a bit. What are you expecting on that front? Do you expect more strengthening because of the rate initiatives? 

A: I am not very sure whether the rate differential is playing any significant role on the currency side any more. On the currency side, the pressure continues to come from significant reversals of the capital flows. The requirements on oil imports are obviously getting directly addressed by the RBI but there are other imports, the slowdown in exports and a significant amount of slowdown of export-related selling from the exporter community as well.

So, if the India story in the very short-term is a bit wobbly, in terms of high inflation fiscal, trade deficit, other environmental issues and if the rupee has significant depreciation simply because of interest rates, then it will not be a story which most people would add too much credence to.