RBI may hike rates by 25 bps, not 50 bps: Morgan Stanley

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The market has been pretty vocal that given the kind of index of industrial production (IIP) data and inflation, there will be scare of rate hike maybe this week or in the credit policy.

Chetan Ahya of Morgan Stanley too seemed worried about high inflation. "I don't see inflation coming down significantly in the second half of this year," he said, adding that an average of 6.5% non-food inflation was seen.

"We would like to see a 50 basis points (bps) hike in rates, but the Reserve Bank of India (RBI) may do only 25 bps on April 20. This however will be perceived negatively by the markets," he said.

Private sector banks, according to Ahya, were moving on with rate hikes and the bond markets were lending RBI on rate hike.

IIP production, he said, should remain high at 8-10%. "We may see base effect catch in the second half."

Below is a verbatim transcript of an exclusive interview with Chetan Ahya on CNBC-TV18. Also watch the accompanying video.

Q: The next likely target for inflation seems to be 10.5%, which is very far from what the RBI's rate of 8% - 8.5% is. Is this a figure that is getting out of control for you yet?

A: We should also look at the non-food inflation which is what the RBI looks at and that also seems to be shooting up quite high. The month of February data which came out on Monday shows that non-food inflation has shot up to 6.5% from 4.5% in the month of January. That's a full 2% point rise in a month. So while all the policy makers are arguing that this is in inflation which is driven by food, we shouldn't loose the side of the fact that non food inflation is already going up and in our view with the way the capacity utilization is that will also move up quite quickly. So we do have a problem on inflation coming in hand.