Money & Banking

Further rate hikes likely

Sudhakar Shanbag | Updated on March 17, 2011

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Deposit rates, which were lagging, have now moved ahead and are in the positive real rates territory, and there would be an expectation of an increase in lending rates.



The increase in repo and reverse repo rates by 25 bps each is in line with the expectations of majority of market participants. The RBI, while attempting to balance growth and inflation, is currently more focused on inflation while recognising the risks to growth. We expect the RBI to resort to a further increase of 25 bps during the May monetary policy. Deposit rates, which were lagging, have now moved ahead and are in the positive real rates territory and there would be an expectation of an increase in lending rates.

The inflationary expectations are largely factored into the current levels of yields in the debt market. From a global perspective the risks on global recovery, including impact on commodity prices, will be in focus. From a local perspective, liquidity, credit growth and the new fiscal year's supply of paper will be watched. Potential risk of under-provision of subsidies will come into the fore in the second half of the financial year.

Equity market

The equity market, at the current level, is aligned to a relatively lower level of GDP growth in comparison with the 8.6 per cent and 9 per cent being discussed.

The level of benefit of the trade of developing markets versus emerging market and the impact it may have on flows as also the trajectory of oil prices is what the market would be watchful of.

We believe marginally lower growth compared to FY11 with emphasis on capacity expansions would be in good stead for the markets for FY12 on the path over the long term.

(The author is Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance Ltd.)

Published on March 17, 2011

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