Surging cost of onions, tomatoes and edible oil have driven food prices up significantly since the last quarterly meet of the RBI in early November. The central bank has raised its key rates six times since March of last year in a bid to tame prices and is expected to tighten further tomorrow at its quarterly monetary review. Petrol prices have also risen sharply in the meantime with state-owned oil companies raising prices by Rs 2.50-2.54 per litre.
The government about 10 days back, reiterated its intention to rein-in prices and said that it will ease import restrictions, impose export controls, and intensify purchase of essential commodities as it has come under fire from the opposition on rising food prices.
What will the RBI do tomorrow as it battles with inflation still on its mind?
In an interview with CNBC-TV18, Anant Narayan, MD - Regional Head of fixed Income & Currency Trading - South Asia, Standard Chartered Bank, & Taimur Baig, Chief Economist - India Global Markets Research, Deutsche Bank AG gave their expectations from the RBI's policy meet tomorrow.
Below is a verbatim transcript of the interview. Also watch the accompanying video.
Q: What is your own expectation? Do you suspect the Reserve Bank should do more than 0.25% or would do more than 0.25%?
Baig: I think they would do 25 basis points. It would be a positive surprise as far as I am concerned if they do 50 bps because that would mean that they are not that worried about the growth outlook and if anything they are putting inflation as a first priority. But again, this is what I think they should do.
But I think they would actually end up hiking by only 25 basis points. There are people within the RBI who are far more concerned about inflation than some others in the RBI. Now the question is between these group of advisors and analysts who at the end of the day has the sway. My reading from the RBI is that at the end of the day the calibrated approach to monetary policy will continue. So while I would like them to raise by 50 bps I fear or think they will still be very cautious and adjust to 25 bps.
Q: You think the market is beginning to start factoring in something more than 0.25%. Even the OIS rates, one year has gone up by 10 bps this morning.
Narayan: I think there is a growing factoring of the possibility that we see an action of beyond 25 basis points. Having said that, I still belong to the camp of 25-25 bps increase.
I think what one must keep in mind while clamouring for higher rates is that the real rates, when you look at certificates of deposits or CPs or even deposit rate for that matter are at very high levels currently. So it’s coming up to 9.75%.
Deposit rates in some sectors are about 10%. These dates are actually comparable to where these real rates were when repo rate was 9% way back in July 2008. So in that sense I think a lot of transmission is already happening. One could argue that the transmission will probably be better this time around than previously.
In that backdrop, I think possibly the necessity for a very strong hike in the reverse Repo is not really that high right now.
Q: You came out with a report on India living with USD 100 price of oil. Are you saying that we could see another 10% rise in petrol prices and 4% to 5% rise in diesel prices? If that were to happen, what could that do to WPI?
Baig: That will keep WPI around 8% through the course of the year. We have been, for a number of months, talking about this much expected base effect to act favourably as a downward drag on inflation. That will be countered fully, if indeed we saw fuel prices go up by another 10% and then diesel prices go up by another 5% or so.
If we have 8% inflation, over the course of the year, despite favourable base effect and hopefully, no further deterioration in the agricultural outlook that would certainly pave the way for the RBI to go on a tighter route. So another 75-100 basis points through the course of 2011 would have to be done at that point of time.
Q: If it is averaging 8% inflation or even maybe sub 8% so even 7-7.5% how does that leave you with your GDP forecast?
Baig: There are two things that we need to start worrying about. One is to an extent, fuel and food inflation spills over and the second one is that we have had about 300 basis points of effective rate hike already. Now, we and most other analysts are calling for another 75 to 100 basis point rate hikes for the course of 2011.
How can all this not have an impact on the investment cycle or on consumption that is dependent on the interest rate cycle? The answer is of course, there will be some casualty and I think, the authorities are more or less set up on that reality. They are not dreaming of this 9-10% growth trajectory.
I think they will be very happy if we end up FY11-12 with our 8.5% growth and inflation coming down to manageable level as oppose to growth going to 9% where inflation staying at 10%.
The government about 10 days back, reiterated its intention to rein-in prices and said that it will ease import restrictions, impose export controls, and intensify purchase of essential commodities as it has come under fire from the opposition on rising food prices.
In an interview with CNBC-TV18, Anant Narayan, MD - Regional Head of fixed Income & Currency Trading - South Asia, Standard Chartered Bank, & Taimur Baig, Chief Economist - India Global Markets Research, Deutsche Bank AG gave their expectations from the RBI's policy meet tomorrow.
Below is a verbatim transcript of the interview. Also watch the accompanying video.
Q: What is your own expectation? Do you suspect the Reserve Bank should do more than 0.25% or would do more than 0.25%?
Baig: I think they would do 25 basis points. It would be a positive surprise as far as I am concerned if they do 50 bps because that would mean that they are not that worried about the growth outlook and if anything they are putting inflation as a first priority. But again, this is what I think they should do.
But I think they would actually end up hiking by only 25 basis points. There are people within the RBI who are far more concerned about inflation than some others in the RBI. Now the question is between these group of advisors and analysts who at the end of the day has the sway. My reading from the RBI is that at the end of the day the calibrated approach to monetary policy will continue. So while I would like them to raise by 50 bps I fear or think they will still be very cautious and adjust to 25 bps.
Q: You think the market is beginning to start factoring in something more than 0.25%. Even the OIS rates, one year has gone up by 10 bps this morning.
Narayan: I think there is a growing factoring of the possibility that we see an action of beyond 25 basis points. Having said that, I still belong to the camp of 25-25 bps increase.
I think what one must keep in mind while clamouring for higher rates is that the real rates, when you look at certificates of deposits or CPs or even deposit rate for that matter are at very high levels currently. So it’s coming up to 9.75%.
Deposit rates in some sectors are about 10%. These dates are actually comparable to where these real rates were when repo rate was 9% way back in July 2008. So in that sense I think a lot of transmission is already happening. One could argue that the transmission will probably be better this time around than previously.
In that backdrop, I think possibly the necessity for a very strong hike in the reverse Repo is not really that high right now.
Q: You came out with a report on India living with USD 100 price of oil. Are you saying that we could see another 10% rise in petrol prices and 4% to 5% rise in diesel prices? If that were to happen, what could that do to WPI?
Baig: That will keep WPI around 8% through the course of the year. We have been, for a number of months, talking about this much expected base effect to act favourably as a downward drag on inflation. That will be countered fully, if indeed we saw fuel prices go up by another 10% and then diesel prices go up by another 5% or so.
If we have 8% inflation, over the course of the year, despite favourable base effect and hopefully, no further deterioration in the agricultural outlook that would certainly pave the way for the RBI to go on a tighter route. So another 75-100 basis points through the course of 2011 would have to be done at that point of time.
Q: If it is averaging 8% inflation or even maybe sub 8% so even 7-7.5% how does that leave you with your GDP forecast?
Baig: There are two things that we need to start worrying about. One is to an extent, fuel and food inflation spills over and the second one is that we have had about 300 basis points of effective rate hike already. Now, we and most other analysts are calling for another 75 to 100 basis point rate hikes for the course of 2011.
How can all this not have an impact on the investment cycle or on consumption that is dependent on the interest rate cycle? The answer is of course, there will be some casualty and I think, the authorities are more or less set up on that reality. They are not dreaming of this 9-10% growth trajectory.
I think they will be very happy if we end up FY11-12 with our 8.5% growth and inflation coming down to manageable level as oppose to growth going to 9% where inflation staying at 10%.
