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Market participants: More rise in rates possible, range-bound movement likely
September, 17th 2011

Market participants have not ruled out a further rate rise by the Reserve Bank of India (RBI), with the movement in coming sessions tracking factors abroad.

Domestic equity markets, which opened on Friday in anticipation of a pause signal in rate rises, pared gains at the closing as the central bank made it clear there was no change in its hawkish stance on high inflation.

Though the rise of 25 basis points (bps) in the repo rate was in line with markets expectation and was already factored in, RBI left experts wondering whether the rate cycle had peaked or not. The Bombay Stock Exchanges benchmark, the Sensex, rallied 1.45 per cent in a volatile session before settling at 16,889.58, up 0.3 per cent.

Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services, said, While the 25-basis point increase was already factored in, successive rate hikes are going to hurt growth. Market participants are cautious and will take cues from overseas markets. He said RBIs anti-inflationary stance meant the rate rise cycle was not over. There may be one more hike after this, he said.

Fridays rise marked the 12th increase since March 2010. The central bank kept its options open, saying it would be guided purely by the direction of inflation in the coming months.

This does not rule out the possibility of another 25-bps hike, since food inflation is unlikely to fall in the coming months, amid the rise in petrol prices, said Amar Ambani, head of research at India Infoline.

Participants believe after the recent bounceback, the markets would become range-bound. We see markets broadly peaking out the current rally at close to 5,250 Nifty levels and remaining in the range of 4,750 to 5,300 for some more time, said Amisha Vora, joint managing director at Prabhudas Lilladher.

Experts say RBI concedes the likely impact of tightening would mean moderating growth, but would not relent till it sees it reflecting in sobering inflation numbers. Then, bond markets are also likely to be range-bound.

Navneet Munot, chief investment officer at SBI Mutual Fund, said, We expect the bond market to remain range-bound, with a downward bias in yields, over the next couple of months. Sentiments in equity markets should improve on evident signs of peaking of the rate cycle. The markets would closely watch global developments and movement in commodity prices.

According to Ambani, while we would be comfortable with rates staying at elevated levels till the first half of 2013, which is likely, we wouldnt be at ease if more rises in rates follow. Further hikes will impact growth severely. Already, the IIP data has been poor, export momentum is unlikely to continue, credit growth is decelerating and liquidity is getting tighter, he added.

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