StanChart expects 25-50 bps rate hike in April

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Surprise rate hike to have knee-jerk reaction in mkt Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

Q: The level of 8.5% is actually where a lot of bankers are working with in terms Would you say for the rest of this year the market will more likely trade towards the 8.5% range or at the 8% range and on the off times it will spike up to that level you indicated?

A: We have to look at it as two different parts. The 10 year part will go up to 8.25% or 8.5% once the supply starts hitting us. It will probably stop there. I do not see really yields going well beyond those kinds of levels, especially if credit off take has not taken off too much as well but the short end yields could go up. It is a combination of couple of factors. One is if the RBI continues to hike the reverse repo rate and the repo rates then short end rates could go up.

Secondly if the borrowing programme is tailored to reduce the duration pain and increase supply in the short-end of the curve then we could see short end yields moving up a lot more.

That seems to be the broad call-basically flattening of the curve if current circumstances continue and 8.5% and beyond looks tough on the ten year at this moment.

Q: How would the bond market move now if indeed we only have only a CRR move in April and then the next policy rate move only in June? Do you think that is a possibility and is the bond market expecting that.

A: Anything is a possibility. The base case is we are looking at a 25 basis point rate hike in April on the reverse repo and the repo. Cash reserve ratio (CRR) would be calibrated based on the actual liquidity in the market. The market expects that liquidity will be kept ample that the overnight rate would hug closer to the reverse repo rate than to the repo rate-to the left hand side so to speak.

Given the fact that you have a large borrowing programme coming up and the need for industry to get funds liquidity will be kept ample-maybe Rs 20,000 crore or Rs 25,000 crore of surplus liquidity should be there in the system at any given point of time. CRR will probably be calibrated according to those particular situations.

If there is no rate hikes that is clearly a positive. So bond yield should be capped at that point of time. But the bigger point at that point of time would be the actual amount of supply coming into the banking system from the government.