The Reserve Bank of India is likely to reverse its accommodative monetary policy stance from January-March, Kevan V Watts, India Head, Bank of America Merrill Lynch said. "I see interest rates firming up in January-March. RBI has to proceed cautiously from here. Their measures have not been that severe because India's structural story is positive," Watts told reporters on the sidelines of the India Economic Summit organised by World Economic Forum.

Watts, however, did not elaborate on the quantum and pace of rate hikes. Since October 2008, the RBI has cut repo rate by 425 basis points, reverse repo rate by 275 bps and cash reserve ratio by 400 bps in a bid to infuse liquidity and give a fillip to demand.

He said the volatility in the foreign exchange market was posing major policy risks. "There is a huge amount of liquidity flowing into the country, which is causing the dollar to weaken. But, one of the challenges is that the rupee is normally indirectly affected, which causes the volatility," he said.

Commenting on the recent pick-up in activity in the credit markets, Watts said he does not expect the credit spreads to come down significantly in the coming months. "I don't see spreads tightening dramatically in the coming months because lenders are still risk averse," Watts said. In the last one year, credit default spreads of major companies have narrowed by almost 400-500 bps.

Separately, an official at a major Latin American bank said companies that have secured permission from the RBI for external commercial borrowings have not been active in exercising the route because of scarcity of lenders. "The only route that is seeing some activity is through ECA (export credit agencies), which is seeing some activity for short-tenure loans," the official said. Under the ECA, loans to an overseas client are channelled through a local credit agency that covers a part of the borrower's credit risk.
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