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BW Businessworld

"There is a very high chance of rate hike in this policy. Key to watch is whether they settle for 25 bps or 50 bps.", Lakshmi Iyer, CIO (Debt) & Head – Products, Kotak Mahindra Asset Management Ltd

As RBI’s six-member Monetary Policy Committee (MPC) headed by Governor Urjit Patel has begun its three-day deliberations from yesterday, all eyes are on whether the key policy rates would be increased or not. Strongly guided by the persistent inflationary pressures, unabated rupee fall, widening Current Account Deficit (CAD), sky-rocketing crude oil prices and dim global cues, the central bank’s task is well cut out. In an exclusive interview with Manali Jaggi of BW Businessworld, Iyer opines on the factors the RBI can weigh while deciding on the rates it is going to announce tomorrow. Edited exercepts:-

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With liquidity occupying markets' collective mind-space, what to expect with this monetary policy? What all factors RBI might consider before making the policy decision?

Good news is CPI is likely to undershoot RBIs H1 expectations. Not so good news is that crude oil prices are rising while currency is depreciating. Hence, there is a very high chance of rate hike in this policy. Key to watch is whether they settle for 25 bps or 50 bps. Another watch point is if they choose to depart from the neutral policy stance.

How do you gauge market expectations regarding the monetary policy? 

Markets across yield curve have priced in a rate hike of up to 50 bps. The sentiment in market is quite sombre as of now. A silver lining is the reduction in borrowing calendar for 2nd half of FY19. But with weekly supply of bonds and credit off-take in banking system, this joy could be temporary in nature.

If RBI maintains a hawkish stand, will it mean further outflow of FPIs and additional pressure on dollar-rupee value?

Yes, a hawkish stance may continue to spook market sentiments which are already quite low. FPIs have been net sellers in bond markets calendar YTD 2018. With currency wobbliness and mark to market losses due to rising rates, FPIs may choose to stay out of Indian bonds and hence selling could continue.  

Do you expect any solution to the NBFC problem from RBI in its policy announcement? 

Yes, that is the need of the hour for now. Either pre-policy or on the policy day, NBFCs are one of the vehicles for growth in the economy and it is important to have orderly financing in place for this sector.

Your take on US Fed Reserve Monetary Policy? What does it mean for Indian economy? 

US seems set to continue its path of rate increases. This would imply renewed strength for the US dollar and hence pressure points for EM currencies including India with US sovereign rates at north/upward of 3 per cent, there may be monies moving out from EM debt to US treasuries and corporate bonds.

Will it egg RBI to increase or decrease interest rates?

India cannot be a lone star standing at a time when there is a phase of withdrawal in global liquidity gradually. Of course we are on a growth path. Hence, we can afford some rate increases, but if our inflation were to get out of control or if INR does not stabilize then we could see much more aggressive actions from Indian central banker.