India’s RBI may hike redemption rate to 6.75% in 2023 – Arun Bansal of IDBI Bank

“The focus right now is core inflation which continues to be above 6%. Several other components of inflation are also showing improvement. Therefore it is too early to say that inflation has entered the RBI’s tolerance range,” said Arun Bansal, Executive Director and Head of Treasury at Bank IDBI, in an interview.

“The RBI will also have to take into account the depreciation of the rupee and the narrowing of the interest rate differential with the United States… There is still a 60% chance that the terminal repo rate will be raised to 6.75%.”

The RBI has raised the repo rate by 225 basis points since May to 6.25% as part of its efforts to fight inflation. On the other hand, the US Federal Reserve raised interest rates by 425 basis points to 4.25%-4.50%.

The Fed is expected to raise interest rates to above 5% in 2023, which could force India’s central bank to follow suit, the finance official said.

He expects the Indian Rupee to remain vulnerable, with the possibility of hitting a new record low as the Dollar Index prepares to rally.

“We can see another move down 1.00-1.50 rupees in exchange rate against the dollar. continued increase in foreign flows into India,” said Bansal.

The currency is 82.81 to the dollar, and is down 11.4% so far in 2022.

PREFERENCES FOR BONDS

Bansal expects the yield on the benchmark bond’s 7.26% 2032 to remain in the 7.00%-7.35% range in the near term, and ruled out the possibility of a big hike, even if the repo rate reaches 6.75%.

“Most of the negatives are also factored in,” he said, adding that any increase in yields following the rate hike would be temporary. “We will see fresh buying at these levels.”

The yield on the benchmark bond is 7.29%, up nearly 85 basis points in 2022.

Moreover, Bansal expects a positive move towards the inclusion of Indian bonds in global indexes, which should help yields, while buying bonds above the 7.30% level will also help.

He also prefers to add seven- and 14-year bonds to his portfolio, believing them to be much more attractive than benchmark 10-year notes.

“Whenever a rate-cutting cycle begins, these two papers can be a good investment.”

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