Expect more rate hikes between now and yr-end: DSP ML

Dhawal Dalal, Fund Manager, DSP Merrill Lynch, said it is fair to assume that market participants are not expecting any severe action from the Reserve Bank of India in the upcoming credit policy.

But he does expect at least one more round of rate hikes between now and the end of the year.

Excerpts from CNBC-TV18's exclusive interview with Dhawal Dalal:

Q: What really are you expecting from the RBI, if you have really firmed up your expectations as of July 29?

A: I think it is slightly early to comment on what RBI is likely to do. But judging by market participants’ reactions and the movement in the swap rates, it is fair to assume at this point that market participants are not expecting any severe action from the Reserve Bank of India in the upcoming credit policy.

The logic behind that is with so many rate hikes in the past, I think it would be prudent for the RBI to give the market participants and the economy some time to see how they react on previous hikes and tight liquidity conditions, and no significant change.

Q: Do you think you still have an open mind about what to expect from the RBI? For the rest of 2008, what are you expecting in terms of RBI action and where do you see the 10-year bond headed?

A: We are still in the middle of a tightening process by the RBI and I think there will be at least one more round of rate hikes between now and the end of the year. Judging by the trajectory of inflation where the Ministry of Finance expects inflation to remain elevated for quite some time, and with commodity prices refusing to come down in a sharp manner, we believe that the RBI will be in a tightening mode.

Q: So, will we see 9.5-9.75% on the 10-year? What kind of levels are you looking at?

A: At the present level, we are back to the September 2001 level on the benchmark 10-year. Honestly speaking, it will be very difficult to find out what will be the level for the benchmark 10-year to touch. But it will be based on how the RBI gives cutoffs on successive auctions.