Rate hike has been factored in by markets: JP Morgan Chase

Rajeev Malik of JP Morgan Chase Bank says that one should not expect any surprises as Reserve Bank of India may deliver a hike of 25 bps.

Malik further states that revising inflation forecast upwards would be positive. He also expects RBI to raise rates further after this round.

Malik believes that the rate hike has been factored in by the markets. According to him, US Fed is close to a pause as it is more data-dependent now.

Excerpts from CNBC - TV18's exclusive interview with Rajeev Malik:

Do you expect Dr Reddy to spring a surprise this time around as well?

I would be rather surprised if he were to spring a surprise. I think the main motivation for that is the unexpected rate hike that we saw in early June, which has clearly created a lot of uncertainty; both in terms of inflation outlook and expected monetary tightening.

It is quite striking that it's the first time since RBI started hiking rates in October 2004, that atleast publicly, the government does not seem to be making much of an issue about the need for further tightening. At the same time, markets to a large extent, do expect the hike.

My own sense is that Governor Reddy should not be a spoilsport; he should deliver that 25-point basis hike. It will try and clear an element of uncertainty because if he stays on hold again, markets will begin to worry whether it will be another inter-meeting hike or whether he will hike it in October. So you are just prolonging that uncertainty.

What else do you expect the 25 bps hike to come with?

There are two main comments that should necessarily accompany the statement. I think this particular statement becomes a lot more crucial than some of the previous ones.

One is clearly that the Central Bank should better explain the motivation for the inter-meeting hike in early June. RBI has its own way of thinking about inter-meeting hikes, which is rather different and much more benign than how the rest of the world and Central Banks think about it.

More importantly is the inflation outlook. Our own sense is that there is a very strong case for revising the guidance up for inflation forecast for the current fiscal year to about 5.5-6%. There is a risk that RBI does not do it at this particular meeting but perhaps decides to wait till October, when it does a mid-term review.

I would think revising the inflation forecast upwards now, would again be a positive sign. Markets would then begin to appreciate that the Central Bank is very much with it as opposed to knowing well that it needs to revise. But it is only delaying the actual revision.

If indeed he does pause, do you see a lot of collateral damage on markets over here; whether it's bond or equity?

The rate hike is pretty well-anticipated. I think the juice will really be in the details of the statement to the extent that it gives guidance on inflation and for the tightening. Our own sense is that even after this hike, RBI is not really done with the tightening cycle at all.

We still have further rate hikes and that's really driven by both the strength of recent industrial production numbers that you are seeing. There are still stubbornly high loan growth that tells you that contrary to the recent hikes that we have seen, underlying retail demand just continues to gallop along. Something needs to be done about that.

What did you read of Ben Bernanke's statement. Did you read of his statement? Do you think indeed the Fed is close to a pause?

I think it is close to a pause, we still think June hike is likely all the way; it's quite a close call now and very much a case of data watching as opposed to Fed watching, from now till then. The critical issue after the expected pause on the Fed is that it is more likely to hike again rather than start cutting rates. This is what generally a lot of people in the market believe. So the underlying strength still should not necessarily be underestimated.

One should not forget that one of the critical things Dr YV Reddy will have to think about is that even if the Fed is close to pausing, or close to a peak in its interest rates cycle, the underlying strength within the Indian economy is just exceptionally strong and warrants its own pace of monetary tightening.

Do you think after he speaks, people will take away a sense that he sounded hawkish or not quite so?

I hope so. It was somewhat puzzling after the unexpected rate hike in early June; the actual announcement really did not give much insights why that had been done. The Governor spoke a couple of days later and articulated the case. I think markets have taken away more of a worry from that front. Hence, I said earlier that the policy statement this time around is exceptionally crucial and hopefully it would send across a fairly firm hawkish message, in terms of inflation outlook and RBI's expected monetary pass.

You made a point earlier in some of your statements that our markets have increased dependence on capital inflows. Do you expect the RBI Governor to allude that and what sort of pitfalls would there be because of that?

I do not think there will be any added emphasis on that particular point. It is something that RBI, including Governor Reddy have flagged quite consistently and it has been articulated quite well. Markets tend to ignore that particular point of how the balance of payments are shifting and what it means to the rupee. Hence rupee is sitting closer to 47 now. We still think the rupee is under pressure and it is likely to slip further.

The Monetary and Credit Policy 2006-2007