V Srikanth, Head-Treasury at Citibank says that the rate hike was expected given the credit growth, the oil price rise and inflationary expectations.
He further says that going forward, looking at the yield curves, another two 25 bps increase in short-term rates can be seen. He does not anticipate any impact on long-term yields.
Excerpts from CNBC - TV18's exclusive interview with V Srikanth:
What's happening in the rupee market consequent to this rate hike and what are your first thoughts on the main announcements?
There has been an increase in both repo and reverse repo rates; no change in CRR and the bank rate has been broadly in line with market expectations. This increase was expected given the credit growth, the oil prices increase and inflationary expectations. All of them did mean that the market was bracing for an increase.
Given the fact that the market was expecting an increase, yields have remained there. Ten-year Government of India bonds are still trading at about 8.25%, which was the level where it was prior to the hike. The overnight index market for five years, for example, is trading at about 7.30%.
So essentially markets are saying what we were expecting. Now going forward, if you look at the yield curves, it is still pricing in atleast another two 25 bps increase in the short-term rates.
It does not mean that the long end of the yield curve is also going to go up, so it is entirely possible that for 10 years it continues to trade at about 8-8.25% range. I do not think long-term yields are going to be that affected.
A shot in the arm for the rupee?
In a way yes, but it has not really impacted it that much. Some of the other factors are that market will take a cue from what's happening to the dollar overseas. That will be a bigger component of how the rupee moves.
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