Inflation rise, bonds fall - looking ahead to the policy

YoY WPI based inflation has risen to 5.60%, thanks to truckers' strike during the week under review. Primary articles and food component of manufactured products have contributed to the price rise.

Yet, I do noe see any real deviation from the underlying trend. It is a matter of weeks before we see inflation figures in the sub-4% territory.

Bond prices have corrected this week, being the last before the key policy announcement next Tuesday. Lesser section of the market is nor expecting any rate cuts by RBI this time in the policy. I am still a part of this minority. From the Q3FY09 results that have already been announced by corporates, the slowdown is clearly evident in India Inc. Sans a few names, most have spelled out disappointing numbers. I would expect RBI to remain pre-emptive in estimating the impact of slowdown and trend in falling inflation. A 50bps cut in both the Reverse Repo and Repo Rate will be apt given the current juncture. Credit needs to flow at a faster pace to the real sector and fairly quickly. The global factors are not showing any signs of a revival any time soon and it is upto the domestic think-tank to moderate the pace of de-growth in economy.

Apart from rate related measures, expect easing in risk weightages and provisioning norms. With liquidity at almost 56K crores surplus, a CRR cute looks improbable.

Disclosure: I am invested in gilts through a mutual fund scheme.