Rate hike is in the air

Short-term interest rates are expected to rise further with bankers seeing as inevitable a hike in the reverse repo rate. A hike in the reverse repo rate ��� the rate at which banks lend to RBI ��� from the present level of 6% will push up short-term deposit rates and consequently loan rates.

Bankers expect Wednesday���s policy review to centre around the governor���s concern over inflation and the unusually high credit growth. Bankers are expecting RBI to raise the key reverse repo rate to curtail inflation.

As of now, the repo rate stands at 7.25% which has been revised four times in the last one year, while RBI chose to keep the reverse repo rate unchanged at 6% in the last credit policy announcement after hiking it on three prior occasions. Speaking to ET, a section of bankers ��� from bank chairman to treasury heads and corporate chiefs ��� said they expect RBI to hike the rates.

���Since this is a limited period review, not many policy changes are expected. A rate hike may come,��� A Majahan, CMD of Allahabad Bank, said.

However, a CEO of a Mumbai-based public sector bank said, ���A rate hike looks inevitable given that money supply is way above the target. Many banks have raised deposit rates in anticipation of a rate hike. On the contrary, bankers will be surprised if rates are not hiked.���

Money supply is hovering at around 20.4% against RBI���s target of 15-15.5%. Moreover, credit growth is at 30%, which is way above the 20% target set by the banking regulator.���RBI may send some signals either by way of a rate hike or some policy prescription to keep a check on inflation,��� PL Gairola, CMD of Dena Bank, said.

Among other broad changes, market participants anticipate some action on corporate bonds and derivatives front. The rate hike is expected to have a temporary impact on the markets given that to a certain extent, a 25-bps hike has already been factored in.

Partha Mukherjee, president, treasury, UTI Bank, pointed out that the central bank could issue guidelines for screen-based trading in corporate bonds. Akin to an order-matching system currently available for government securities, RBI could look at introducing a similar mechanism for corporate bonds, which could help boost volumes.

The differential between shorter and longer tenor yields has narrowed down significantly to roughly 30 bps over the past three months. Hence, more than hiking short-term rates, RBI needs to pay attention to longer-tenor yields, feel some treasury officials.

Fixed Income Money Market & Derivatives Association of India���s chief executive officer, CES Azariah said: ���Allowing repo transactions in corporate bonds is a welcome step, while there could also be some action expected as far as the final guidelines for derivative transactions are concerned.���

According to a senior treasury official, the central bank could allow for an additional category of players in the form of banks which are non-market makers but can sell derivative products to corporates.

Manoj Rane, head, fixed income and treasury, BNP Paribas, said in order to make corporate bonds a more liquid instrument, it is imperative that the central bank finalises the draft guidelines on derivatives.