New Delhi: UBS expects more tightening of liquidity from the Reserve Bank of India. It says that by the end of the year, the rates could go higher by about 50-75 basis points.
Its Director Bhanu Baweja says that in global central banks, liquidity tightening is the pattern. He added, the central banks do not want the inflation to run away like it did in the late 60s and the early 70s.
According to Baweja, liquidity will tighten in the near-term.
"The equity markets have already anticipated that. This sort of a situation will continue for some time but we should not get overly bearish because the central bank is trying to limit the risk premium," he says.
Excerpts from CNBC-TV18's exclusive interview with Bhanu Baweja:
Q: What did you make of the Central Bank’s move on raising the repo rates?
A: I think that the Central Bank in India has been behind the cup for a long time. The economy and credit growth have been running on at their full pace.
The inflation figures in India have been understated. There was an asset price inflation in the stock market and property market. The goods price inflation was also understated.
So I think the RBI took a long time to come in. If it were completely under them, then they would have hiked it earlier. So moving forward, we should expect more tightening of liquidity from the RBI.
Q: What kind of impact do you see, in terms of inflation and what would happen to the Rupee now?
A: If you look at the global central banks, liquidity tightening is the pattern out there. It is not just in India, the global economy has been doing well.
If you look at the Federal Reserve, Bank of Korea, Bank of Thailand, Bank of South Africa, European Central Bank - all central banks are tightening their interest rates.
In fact, the news is that all the central banks are actually bringing forward their tightening ambitions.
If there is a pattern globally then it seems that the central banks want to nib inflations in the bud. They do not want the inflation to run away like it did in the late 60s and the early 70s.
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If I were a long-term investor, I would have taken heart. This reduces the risk premium for long-term investors. This will mean that, globally, most central banks will finish the tightening cycle earlier than expected because they are front-loading their rate hikes.
India will continue to go for a while. The risk premium on higher inflation will reduce, if the RBI moves sooner rather than later. So I do not see these moves necessarily as negative.
That took a long time to come. They should come as soon as possible and nib inflationary expectations in the bud. Then we can get back to be bullish on the market.
Q: In the near-term, do you expect liquidity to tighten further even from the adjustments that have been made in the last couple of months?
A: Absolutely, I think liquidity will tighten in the near-term. The equity markets have already anticipated that. This sort of a situation will continue for some time but we should not get overly bearish because the central bank is trying to limit the risk premium.
They will limit inflationary expectations also. Yes, liquidity will tighten for now. Moving forward in a month’s time, one might find from an investor's perspective, a much clearer sky.
Q: What do you think markets should start factoring in now; another 25 basis points hike in July by the RBI?
A: Yes, I do think so. By the end of this year, we should see rates higher by about 50-75 basis points.
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