Expect RBI to continue with its anti-inflationary stance till Oct-Nov: Ananth Narayan, StanChart

In an interview with ET Now, Ananth Narayan, Head of Forex Trading, Standard Chartered Bank, India, gives his outlook on what can be expected from the RBI on Tuesday. Excerpts:

ET Now: While all expectations point towards the 25 bps rate hike which is already priced in by the markets, what is it that you are going to be watching out from the language from the RBI come tomorrow?

Ananth Narayan: The first thing that we will look out for is how much RBI acknowledges as the issues coming in from overseas. What has changed since May when RBI clearly enunciated that inflation alone is the primary concern for the RBI to tackle with, is what has happened in the west specifically with the euro crisis and with the sovereign debt crisis hovering around in the US as well and the threat that it might lead to a slowdown. Now how much RBI acknowledges that as an issue and how much RBI gives credence to the fact that data such as IIP and the credit deposit ratio here point to a possible slowdown in India and how much that is on the radar is what we will look for, but otherwise we are with consensus. We expect the 25 basis points rate hike tomorrow and the RBI to continue with its anti-inflationary stance till maybe October-November when inflation should peak and thereafter we could see some slowdown.

ET Now: You did point towards as to what kind of headwinds the global situation may actually project at this point in time, what do you make of the US debt situation and the fact that there still has not been a resolution to the debt ceiling? If by August 2nd there is no resolution, how much of negativity will spread into the emerging financial markets?

Ananth Narayan: No, we clearly expect the resolution to come about by August 2nd. There is a lot of posturing happening now, but in the greater interest of the overall financial markets and the US in general. In specific, we should see a resolution to this problem. The bigger problem which probably bothers all of us a lot more is what is unfolding in Europe. Clearly there was a lot of positive which came out the last week with the EU summit etc., but there is this niggling feeling that we are just kicking the can down the road as far as the problem on the sovereign crisis is concerned. The real concern is that that balloons up to envelop a few more nations and then we have a Lehman sort of a situation unfolding all over again.

That is the doom’s day scenario that clearly bothers a lot of people and I am sure that is there on the top of mind for RBI as well. But having said that clearly at the moment, inflation has to be key, notwithstanding what is happening globally, what happens eventually into India because of the global events are second order events and we cannot really wait for that. So RBI will have to play with the intention of controlling inflation which is likely to see even double digits in August. So until September-October, RBI has no other choice.

ET Now: What do you think could come in in terms of commentary? Do you think the RBI might signal that it is towards the end of this rate hike cycle?

Ananth Narayan: I guess there is a possibility that might happen, but to be honest, I would be surprised if that were to happen right away tomorrow. The fact is that all the conditions that the RBI had defined in May when it took that bold move of a 50 basis point hike still remain. The fact is inflation is still surprising on the higher side and the revisions especially are pretty bad. The oil price hike while it has come through a part of it, a big part of it has still not gone through, there are fears on the fiscal side as well that we might see a slippage on the fiscal side and current commodity prices especially oil prices still remain pretty high. So all put together, those conditions still continue. Yes, there is a possibility of an event and a headline driven breakdown in global growth which could percolate onto India, but I do not think you can play for that kind of a disaster scenario as yet. So as of now, they will continue with the current stance. They will mention the fact that the external environment has worsened a lot more since May.

ET Now: Do you see the tenure inching towards 8.5% or more this year?

Ananth Narayan: At this moment, the capacity of the system to absorb government bond supply has increased quite substantially. So even if you do have a couple of rate hikes and we believe repo rate will eventually go up to 8%. If you look at the incremental credit deposit ratio at 80% now as opposed to 100% a couple of months back, if you look at the credit off take at sub-20% right now at 19.9%, the capacity for the system to invest in duration has gone up. So to that extent, 8.5 looks a little tough right now. What could take it up to 8.5 is if the global events pan out such that we get surprise on the upside as far as rate hikes continue. So if we do go beyond 8% on the repo rate, then yes we could see a stress up at the 8.5% mark, but otherwise, the system should absorb even the increased supply on account of possible fiscal deficit slippage.