See 25 bps hikes in CRR, Repo rate: HSBC

Robert Prior-Wandesforde, Senior Asian Economist, HSBC Holdings feels that the Wholesale Price Index, or WPI will move up to 15% by CY08.

He expects a 25 bps hike each in repo rate and CRR in the policy next week along with a 100 bps hike in rates from the current levels.

He believes that inflation is likely to peak at 15% in CY08 and added that the 10-year bond yield will touch 10.5%. According to him, the Rupee will be in 41.5-43 to a dollar range and moreover he does not expect downgrade in sovereign credit rating of India.

Excerpts from CNBC-TV18’s exclusive interview with Robert Prior-Wandesforde:

Q: The inflation number last week did slightly in terms of Week on Week (WoW) run rate. It was 25% higher from the week, we were rising at 0.4% before. Do you think that the inflation appears to have peaked off for now given that crude is softening?

A: It is far too early to say that. The weekly numbers can be highly volatile and just because we have one softer number doesn’t necessarily mean that we have peaked. We are still looking for the Headline Wholesale Price Index (WPI) rate to move upto 15% by calendar Q4 of this year.

Food component was soft in last week’s release. Rise in food prices and inflation is risky with uneven monsoon as they are in India. Along with other components is the manufacturing and the fuel issue because it takes time for oil price rise is to impact India’s WPI. It is too early to call the peak.

Q: What are your own preliminary assessments of what’s happening on the monsoon front and do you think that’s actually going to queer the pitch a lot more for Indian inflation numbers?

A: Monsoons so far have been uneven and that clearly could have implications for food prices within the Wholesale Price Index (WPI). Food prices are one and the only element within a series, which hasn’t really shown a significant pick up yet. The latest figure was only just over 5% whereas we are talking double-digit numbers for vast majority of the other components. There is risk there, not just domestic risk but also risk from what has happened to international food and commodity prices. What we often see is that it takes time for international commodity price developments to impact India’s WPI.  We have not seen the full effects of that yet.

Q: What are you expecting on July 29 Reserve Bank of India (RBI) action in terms of rate hikes for rest of 2008 in particular?

A: I am looking for a 25 bps hike both in terms of repo rate and Cash Reserve Ratio (CRR) on July 29 next Tuesday. It is a fairly consensus call, which given the RBI’s preference to surprise markets leaves me a little bit nervous. But nevertheless, the direction is up and I don’t expect the rate hikes to stop there. I am looking for a total of 100 bps points from here on both the CRR and the repo rate as the RBI attempts to get to grips with inflation and anchor inflation expectations.

Q: What is your own sense of where we are with real lending rates in the curve? Do you think a lot of the tightening is already done and it’s just going to be a more stable performance? Or do you think the tougher part of the curve for lending rates is yet to come?

A: We have seen a loss not just in the last couple of months but through 2006, 2007 and so on. So, lending rates have risen a lot and will rise further. With RBI set to increase policy rates by another 100 bps or so, lending rates will rise from here. The RBI will certainly align to see banks pass on more of the increase in policy rates that is recurring at the moment. 

Q: Given these forecasts of yours in terms of interest rates you clearly will be looking at the ten year yield above the double-digit mark of 10%, what is your prediction in terms of the highs it can touch? Likewise what is your view on the rupee?

A: In terms of the ten-year yield, we are looking for it to hit 10.5% for the end of this year. So, it has got a substantial pick up from here. We have seen a rally in the last few days that has been helped by the drop in oil price and if the oil price were to continue dropping from here then our prediction would be a little too pessimistic. But if we see it stabilized, WPI inflation hits 15% and the Reserve Bank of India (RBI) raises rates by 100 bps, then a ten-year part of the curve will come under fairly sizeable pressure.

The rupee have seen some relief recently from the drop in oil prices. The RBI and the government are thinking about a range here in the rupee. It rose too far too fast during the course of 2007, we have had this pullback in the rupee recently and they would not like to see its move much beyond Rs 43-43.5 against the dollar. So, the likely range now is something like Rs 41.5-43.5 for the rupee against the dollar. We will see intervention perhaps in both directions from the RBI to try and keep that range intact.

Q: As an observer, what have you made of the political developments and do you feel that there might be a step up on policy or even the government taking a stronger handle over what has happened on the deficit situation?

A: Not necessarily, even I was surprised by the strength of the positive market reaction yesterday. It is far from guaranteed that the governments will get through these whole series of reforms particularly in the financial sector before the next general election is called. At the same time, what we do not know is what all these various parties and individuals have demanded from the government by way of economic policies and other policies in return for supporting the government. There were 19 members from different parties that were supporting the government in the vote on the other day. That suggests that this coalition could be quite unstable. There is going to be a lot of pressure in a very short space of time for these different parties to make a mark before the general elections. Populous policies could come through if anything currently leads to higher budget deficit rather than lower budget deficits.  

Q: Do you expect that a downgrading of the sovereign rating is on the cards and what would that mean in terms of growth implications for not just FY09 but FY10 as well?

A: Currently our sovereign credit guys don’t expect more downgrade to India’s sovereign credit rating. We may see some of the other rating agencies, which are doing similar things. The situation would not be bad enough to trigger an actual downgrade to the sovereign credit rating. So hopefully that is the case the cost of finance for Indian companies is going to rise even further.