Rupee ended higher at Rs 48.33 per USD as against its previous close of Rs 48.98.
Q: 8% is probably as per your expectation, what is the trajectory from hereon to the end of 2008 and to the end of financial year?
A: We have been lowering the trajectory in terms of what we have been expecting earlier. I believe it might still be reasonable to look at around 2.5-3% wholesale price index (WPI) inflation rate by end March. Although there is a high probability that it will fall further - there is fairly steep fall in inflation.
Q: What kind of a spin will you give the Reserve Bank of India (RBI) action from hereon, they have given some sweeping rate cuts but we had some pessimistic statements on growth coming from the RBI governor for the first time yesterday and you have the Index of Industrial Production (IIP) numbers coming out tomorrow which many people will expect could be zero or 1% at best and maybe negative if we are even unlucky, what are your own expectations in terms of the IIP numbers and more importantly what do you expect from the RBI?
A: The IIP numbers generally will be fairly bad as you said anywhere might be negative or zero or 1% but very low which will probably continue well into November. The November numbers will also be very bad.
I am a little surprised that inflation in India has not fallen more sharply than what we have seen so far. It will fall as you were saying once the petrol and diesel price cuts are factored in but I am globally seeing the price levels fall and the inflation rates being relatively sticky.
Q: Where do you expect reverse repo rate to be on March 31?
A: We are expecting another 50 basis point cut, so 4.5% by March end.
Q: What would you therefore estimate the 10 year could go to if the reverse repo rate is going to fall so much, we are going to see a fairly sharp fall in bond yields as well- what can the lowest bond yield be in this cycle of rate cuts, do you think the 10 year which had gone to 4.95 in the last cycle could go to 4% level as well?
A: Probably, 10 year although there would be some because the concentration of papers that are now coming in, the effects of inflation, inflation expectations, the policy rate signals and so on might be somewhat offset by the increased supply of paper in the 5 to 9 year range and probably thereabouts translating into 10 year, the increased supply of paper. We might even see a further smaller tranche of market borrowing, so that might exert something of an upward pressure on rates but you are right the 10 year rates might respond form 6.5 but I probably wouldn’t go down that low in this current environment.
Having said this growth obviously becomes a far more important indicator for policy authorities now and the focus will be on stimulating growth further especially since the slew of revisions in global growth forecasts, which have implications for our exports have also sharply been revised downwards.
So given all this, I think there is room for further policy rate cuts although I don’t think this will happen immediately. I have a feeling that policy rate cuts will take some time – somewhere around January policy if there is further significant deterioration in the growth environment, if employment rates rise and so on we might see an action sooner.
