The Hindu Business Line : More rate hikes in future, says UBS

The Global Head of Emerging Markets Strategy at UBS, Mr Bhanu Baweja, says that there will be more rate hikes in the future and the reverse repo rates are likely to rise to 6.5 per cent by the end of the financial year 2007.

He adds that inflationary pressures in India, both in the goods markets and in the assets markets have been lingering for some time and that's reflected in the large current account deficit that India suffers.

Excerpts from CNBC - TV18's interview:

How have you read what the Governor had to say and are there any surprises in what the Credit Policy has delivered?

No, not in terms of the actual move, but what was pleasantly surprising was that despite some pressure from the Government, I think the RBI belatedly managed to show some backbone of its own. Because there has been some concern in the international markets that the RBI has been really under the Ministry of Finance's pressure not to hike interest rates substantially.

The fact that they have sounded hawkish is also positive. I say that it is positive because I believe that the RBI was way behind the curve in terms of inflation.

Inflationary pressures in India, both in goods and assets markets have been lingering for some time and that's reflected in the very large current account deficit that India suffers. As a result, the RBI should have tightened much earlier, but better late than never.

Do you think that this might just be an intermittent pause before he goes ahead and raises rates and do you buy his view of inflation at around 5-5.5 per cent mark for the medium-term?

I do not really trust the WPI (wholesale price index) out there. I think the RBI is in the process of releasing better measures and I think inflation in India is higher than 5-5.5 per cent. But I do think that moving forward, we will get more rate hikes; the statement was reasonably hawkish and for a very good reason.

Do you have targets set out as to where he might head probably in the next nine to 12 months?

Yes, I do think that by the end of this fiscal year, we could see a reverse repo rate of 6.5 per cent.

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