Friday, July 11, 2008

Inflation at 11.89%

Source : Power Breakfast/CNBC-TV18

Inflation for week ended June 28 is at 11.89 percent versus 11.63 percent. A CNBC-TV18 inflation poll conducted earlier, saw inflation for week the ended June 28 at 11.69 percent. The 10 year-bond yield benchmark has crossed 9.5%.

Indranil Pan, Kotak Mahindra Bank feels that inflation is definitely trending on the higher side, and the numbers for this week were at 11.84% and for the next week he is looking at a more sideways numbers around 11.90% or so. He does not expect it to go to 12%. He added that given the fact that it is trending higher there could be one round of monetary reaction of July 29; he expects a 25 bps increase in the repo rate. He believes that the benchmark yield is more or less factored into the prices at the moment and so a 25 bps increase in the repo rate would not do much harm from these levels.

Arun Kaul, GM-Treasury Finance, Punjab National Bank or, PNB feels that inflation continues to be high and if Wholesale Price Index (WPI) remains where it is right now, it would still take six-months for the inflation to come to single-digit from the double-digit.

He said that although the banks are borrowing money from the RBI, money supply continues to be about 20% and reserve money is around 28-29%. So possibility of CRR hike and repo rate hike cannot be ruled out and that is what market is indicating, he added.

“The yields have moved upto 9.47% right now but they did cross 9.50% yesterday and also today. The market is worried and market is of the view that repo rate hike as well as CRR hike is very possible,” Kapur said.

Further he said that the 10-year (bonds) last week was somewhere around 9.29-9.30%. It has already moved by 20-25-bps, he said. So the market is already factored in 25-bps hike in the repo rate, he added.

Gaurav Kapur, Senior Economist of ABN Amro Bank said that the inflation pressure will strengthen in the future. He said that there will be a hike of 50 bps in repo rate. He sees GDP growth at 7.5-7.6%. Kapur feels that the RBI action is very clear from here on, the inflation is trending upwards and this has been a week where inflation numbers have strengthened and with oil prices not looking at easing off in the near future, it is clear that RBI will have to tighten the monetary policy even more.

According to Kapur, in the July policy there could be another 50 bps hike in the repo rate and in terms of yield curve action which would mean an upward pressure on interest rates continuing. “Off late the 10-year yield has moved up sharply; on June 30, it was at 8.70% and now it is at 9.30%, swaps have come off a little but that is more to do with market technicals than fundamentals,” he said. Fundamentals continue to point towards yields and swap rates heading higher, he added.

Amitabh Chakraborty of Religare Securities expects hike in rates. He feels that there is a possibility of Nifty touching at 4400 levels. He

said that currently Sensex’s EPS number is Rs 970 for FY09 and Bloomberg consensus is Rs 986. “Post results they will probably be bringing down the numbers to Rs 940-950 level.” He feels that lot of downgrades will happen and if any windfall tax etc happens, then there has to be downgrade on Reliance numbers and it being the heavy weight, it will bring the Sensex EPS quite down.

Chakraborty believes that 11,500-12,000 level on the downside is much limited and one should go long-term positive and the upside in the market is probably 14,500-15,000 - that is the trading band for the next 6-7 months, he said.