See 25 bps repo rate hike on July 29: Kotak Mah Bk

Indranil Pan, Chief Economist, Kotak Mahindra Bank, sees a 25 bps repo rate hike by the Reserve Bank of India, or RBI, on July 29 and a 50 bps hike this financial year.

He also sees a cash reserve ratio, or CRR, hike in the days ahead, given the liquidity in the economy. He expects inflation to touch 13%, going forward. He sees GDP at 7.5- 7.8% this year.

Excerpts from CNBC-TV18's exclusive interview with Indranil Pan:

Q: Will you rethink where you can see the interest curve ending in 2008?

A: Inflation is definitely heading higher. Our own sheets are pointing towards 13% inflation. It is not likely to stop at that. Oil prices continue to go up and therefore the non-administered portion of the oil prices, as well as most of the manufactured prices, would be rising.

The Reserve Bank of India may increase the repo rate by 25 bps on July 29 itself. Given the type of liquidity flows, it could also consider raising CRR in the days ahead to keep this system at the upper end of the corridor. 

Q: Where do you think the rates can go? If you want a guess either on the ten-year or the five-year old Overnight Index Swap (OIS), or the repo rate, where do you see the inter-bank curve starting? Will it start at 9%? What is the level it can go to? What can be the impact on growth in the current year itself?

A: There may be a 50 bps upward move in repo rate in this financial year. That would make it 9%. On the ten-year, we are looking at a broad range of around 870-920 in this financial year. It is a very volatile market and is very difficult to envisage, where exactly it will be in March.

Most of the pressures are pointing towards the higher side. We have already factored in a significant amount of slowdown on the industrial production numbers. Assuming there could be some amount of slowdown in services, because the interest rates are tending to move significantly higher, we could build a 7.5% to 7.8% GDP forecast for this year.

Q: What is your forecast for FY10?

A: We are looking at 6.8-7-7.1% of GDP because the repo rate hikes have pushed interest rates and the PLRs higher and that would impact GDP growth with almost a 10-12 months lag. So, there will be a significant softening in FY09-10.