Two weeks back, all the six members of the monetary policy committee (MPC) had voted in favour of a "status quo" policy. However, the minutes of the meeting reveal that inflation is back as an over-arching concern and one member even believes that a rate hike could be necessary.
To carry this discussion forward and the outlook on rates going forward CNBC-TV18 spoke to Ananth Narayan, Head-Financial Markets, Standard Chartered Bank.
With the MPCs mandate clearly focused on inflation and the trajectory of inflation not pointing to 4 percent by end of fiscal year but would be closer to 5 percent, the bias towards higher rates with inflation in focus will sustain.
The committee is also eyeing other factors like Fed hiking rates, uncertainty on monsoon and GST implications for CPI, so a rate hike seems a lot more likely now than a rate cut, given the clarity from the minutes of the meeting.
Narayan says, although the base case of the bank remains for a prolonged pause for some time given the other situation, the market seems to be adjusting itself to the possibility of rate hikes than rate cuts or status quo.
When asked if he would look at selling or buying 10-year bonds, which are currently trading around 6.97 percent, Narayan says he would wait for some more time. The reason being market thinks we are going to see a bias towards higher rates from the MPC, given the nature of its mandate, so one has to be prepared for hawkish tone.
Moreover, uncertainty on many fronts will remain, and when there is uncertainty, it is always easier to be afraid about higher inflation than not. There is also a lack of clarity on how supply-demand situation for bonds will pan out from here.
“Given all this, we could see steepening of the curve, we could see 10-year and beyond yields moving into a trajectory of 6.95-7.15 percent, so difficult to hasten and start buying bonds,” says Narayan.For more, watch video