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Rediff.com  » Business » 25 bps hike most likely outcome of Fed

25 bps hike most likely outcome of Fed

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June 28, 2006 20:31 IST

The two-day Federal Reserve meet, which started today, will decide on interest rate hike. Founder and director of Libran Asset Management, Anantha Nageswaran, says that it is unlikely that they would go for a 50 basis point rate hike. He still believes that the most likely outcome is 25 basis points tomorrow.      

Excerpts from CNBC-TV18's exclusive interview with Anantha Nageswaran:

The anticipation is a 25 basis points hike- do you think that is what the Federal Reserve will announce or do you think there will be a surprise of 50 basis points?

I think given the Federal Reserve context in the past, it is unlikely that they would go for a 50 basis point rate hike. I still believe that the most likely outcome is 25 basis points, tomorrow.    

How do you picture the move of the Federal Reserve? How many more rate hikes do you think they would make before stopping?

Personally, I think we are looking at perhaps 5.5 per cent by end of third quarter and after that the Fed may pause. But the risk after 5.5 per cent is still even further. It is not necessary that the rate would remain at 5.5 per cent and then the next rate move, whenever it comes, would be a down move.

That is not guaranteed and I think at 5.5 per cent there is still a chance that we might see 5.75 per cent as well as 5.25 per cent.

In terms of a stance on inflation, what else could the Fed Reverse say to either surprise or spook the global markets? We have seen an overall tightening of liquidity, what would your expectation be from Ben Bernanke?

I think their comment would still be very much middle of the road. I think they would keep the door open, to pause, hike or ease. I think they would keep all the three options open. I do not think there would be a particular encouragement for the bull or the bear. 

Give us a quick view on India. What comes after the drastic correction that we have seen, has you view turned anymore bullish? Are you still varying of it in the emerging markets space?

I think putting India in a global context, I would still remain cautious at this point of time. What we have seen in the last couple of weeks, a so-called mild recovery. Especially those who are technically inclined, might see this as a small 38.2 per cent retracement of the entire correction from 12,700 to 8900.

So that would have taken the Index back to 10,400 and that is what it did. I believe, therefore, that the Indian stock market, as is the case with Brazil, Turkey or Russia, is still risky and more geared or skewed towards the downside for the next three- four months.

Is there a liquidity concern that you are seeing at this point, with interest rates going up? Where do you see liquidity now skewing?

I think liquidity definitely is being withdrawn globally and is still been withdrawn quite sharply. It is not just the Federal Reserve; it is Japan, China, European Central Bank, and even Canada. So it is a global concept of tightening.

After nearly five years of recovery in the global risky assets, that is if one takes the post September 11 as the bottom, I think that the tie-up for payback has just come in and it is not yet over in my view.

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