Monetary policy 09' likely to remain tight: Axis Bk

Saugata Bhattacharya of Axis Bank feels that for the next year in 2009, the monetary policy impulses are likely to remain tight. "If that is the case, then despite high savings, high investment it is very likely that growth will suffer at least for the next year or so. Together with this, partly as a result of the current monetary policy actions and the base effect of the very high inflation this year, the inflation levels are likely to come off."

Excerpts from CNBC-TV18's exclusive interview with Saugata Bhattacharya:

Q: What are your expecting by way of Reserve Bank of India (RBI) action on July 29 and by end of 2008?

A: The inflationary numbers that we are seeing are more or less on track. There is little bit lower inflation this week but we had been talking about the secondary and the tertiary impact of the oil price rise for a long time. We had been expecting inflation to have gone pretty much close to 12%, 2-3 weeks after the initial oil price shock. It is not that the current round of inflation that we see - 11.62% is completely out of line with expectations. So it is in line with expectations and so long as inflation doesn’t surge, it is unlikely that the RBI would take further monetary policy action unless two or three things happens - excess liquidity opens up, which it might in the next week or so in July when the government spending comes back on line. If that happens, then you might see another CRR increase. But remember if the CRR increase that has been scheduled are precisely for least a fortnight. So that is going to take liquidity out during these two fortnights. It is said that real interest rates are now deeply negative and that might provoke another 25-50 bps hike in repo rates or some other rates to get overall yield curve-the shorter end of the yield curve up in line.

 At the same point, the markets having factored in some increases already. You will see market rates have increased significantly, the Overnight Index Swap (OIS) rates especially have increased very significantly and so the market seems to be doing the RBI’s job so that the RBI doesn’t have too many further interventions.  

On Inflation:

The growth pace might be maintained although it affects the current rounds of tightening - the continuing tightening are likely to hit the growth impulses, the capex impulses, although the savings are high. But it’s become very expensive now to invest. The capex has become much more costly and given the current scenario of oil, it probably continues to remain at fairly high levels. For the next year in 2009, the monetary policy impulses are likely to remain tight. If that is the case then despite high savings and high investment, it is very likely that growth will suffer at least for the next year or so. Together with this, partly as a result of the current monetary policy actions and the base effect of the very high inflation this year, the inflation levels are likely to come off.