Multiple rate hikes on anvil if oil boils: PNB

Arun Kaul, GM-Treasury Finance, Punjab National Bank said the market does expect some sort of monetary tightening by the RBI, if oil and inflation continues to be high. He sees a series of hikes in both repo rates as well CRR, in order to curtail the demand side if oil prices remain high.

Kaul added that Reddy’s statement yesterday was very comforting. "Yields came down from 8.73%-8.74% to as low as 8.61% yesterday and today it was 8.55%, this clearly indicates that the market is slightly comfortable."

He added that the market will be closely watching the inflation figures on Friday and oil prices.

Excerpts from CNBC-TV18's exclusive interview with Arun Kaul:

Q: What are your expectations from the Reserve Bank (RBI)?

A: The market was tense when the inflation figures came in at 11.05%. There was a feeling that imminent action would be taken by the RBI to control inflation and curtail the demand side. Dr. Reddy’s statement was very comforting and we did see yields coming down from 8.73-8.74% to as low as 8.61% yesterday and today it was 8.55%. It clearly indicated that the market is slightly comfortable. Nevertheless, there is a worry in the market. The market will be closely watching the inflation figures on Friday and oil prices as well because Dr Reddy clearly said that he would be watching oil prices and inflation.

The market does expect some sort of monetary tightness from the RBI, if oil and inflation continues to be high. That is the reason the scale of operations and volumes are very low in the bond market .

Q: Dr Reddy pointed out that the society and the economy may perhaps have to get used to high oil prices for a relatively long period and the RBI will help smoothen this adjustment. Does this give you an impression that he is looking at a series of rate hikes and a change in the monetary policy stance altogether? What are you expecting in terms of the amount or the number of rate hikes? Which category may he use: a repo rate hike or a CRR hike?

A: If oil prices remain pretty high, then there could be series of hikes in both repo rate as well CRR, in order to curtail the demand side. It is difficult to predict how many increases there would be, but the market does expect a couple of increases both in CRR as well repo rates.

Q: What will happen to the bank’s Prime Lending Rates (PLR)? When are you expecting them to rise?

A: The market is very divided. Some people believe there would be a 25-bps hike in PLRs before the credit policy is announced . Others think only the credit policy would be announced. Nevertheless, the markets are very keenly watching inflation and oil prices.

Q: Would you say that bank PLRs will be raised?

A: Banks would certainly look at their own cost of deposits. If the cost rate is moving up, they will try to pass on part of it to the customers. As to when and how, we will have to wait and see.