Are we staring at 12% inflation?

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS Will banks react before RBI acts again? RBI hikes CRR, repo rate; experts see growth, mkts impacted Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Nitin Jain , Managing Director, I-Sec Primary Dealership feels that the trend in the manufacturing inflation prices is up only and till that break comes decisively in that trend the bias for inflation number has to be going up. "Specially then there is no base effect till February next year." So 12% is possible if there is no softening of the trend, he added.

 

Excerpts from CNBC-TV18's exclusive interview with Nitin Jain:

 

Q: A very strong action has come which seems to indicate that the Reserve Bank of India ( RBI ), which was seem to be behind the curve is now perhaps a little ahead or in tune with the data. What are you expecting from the inflation numbers forthcoming tomorrow and hereafter do you think that you could see very ugly numbers even beyond the 12% mark?

 

A: The trend in the manufacturing inflation prices is up only and till that break comes decisively in that trend the bias for inflation number has to be going up. Specially then there is no base effect till February next year. So 12% is possible if there is no softening of the trend.

 

Q: What would you expect therefore by way of RBI action? Would you expect that the RBI may have to move as early as the July 29 policy or even earlier what are you expecting really in terms of a regulatory action?

 

A: For the next six-nine months, there could be continued tightening bias at the minimum. That means principally liquidity will remain tight and typically the first half of any fiscal year is slightly more liquid but that is already tightened now. So certainly the second half of the fiscal will remain tight, usage of all liquidity tools as and when required.

 

On the rates front, I do not think it is a done deal that they will hike rates in the policy, it may not be done in the policy but decision maybe taken subsequently. Impact of any monetary measure starting April is not likely to follow through in the data very quickly. So it is more of monitoring the trend and towards the end of that oil prices and other significant commodity prices will probably determine how the dynamic situation is evolving.

 

Q: It is now apparent that in the second half the government may have to borrow much more or definitely more than what was declared in the budget. How would you see that impacting interest rates? Basically in a second half where do you see the yield curve, both Overnight Index Swap (OIS) and the ten-year?

 

A: OIS right now may be suffering from little bit of a bear fatigue but should consolidate around these levels. There should be paying if it goes below 9.5 or towards 9.5 but nobody is convinced that near 10% is a good pay level.

 

Situation is very different on the government bond side, we have had very little net statutory liquid ratio (SLR) supply in Q1 compared to the demand generated and therefore bond yields are slightly lower and the ten-year has to quickly push towards 9% level and that will happen in the month of July.

 

Going forward, extra borrowing and host of other reasons, plus a very major issue will be continued tightening bias from the RBI. So bond yields have only one place to go which is up at this point of time unless there are significant softening in the commodity prices.

 

Q: At this point in time, you are dealing with limited and unpredictable data, how much are you expecting by way of RBI rate action on the reserve front or on the repo front and therefore given the limited data you have where would you see the yield by end of 2008?

 

A: If there is no break in the inflationary trend domestically or if there is no significant change in the global commodity prices, repo rate first stop will be at 9%. Timing is slightly unpredictable maybe by August-September or possibly by October.

 

So government bond yield curve will move commensurately and the ten-year might touch 9.5% but that is also subject to commodity price behaviour.