A sharp jump in interest rates in recent days has surprised debt fund managers. In an interview with FE?s Chirag Madia, Kumaresh Ramakrishnan, head, fixed income at Deutsche Asset Management says that credit growth will moderate over the medium term, helping deposit growth to catch up. This in turn could help tame inflation, which is already falling from higher levels for certain categories (food).

We just saw the 10-year benchmark yield touching 8.3%.Given the current situation where do you see the yield in the days to come.

Obviously there has been some pressure on the yields post the central bank policy; 10-year bond yields have reacted and moved up sharply since then. We are expecting a fuel price hike (diesel, LPG and kerosene) by next week. Hence, there is pressure which is being factored in the bond market.

10-year g-sec yields will continue to remain within the tight band of 8-15-8.30% in the coming days with negative news being already priced in. On the positive side, food inflation is at an 18-month low.

Will inflation cool off over the medium term?

We would expect interest rates to continue at these levels for some more time as Reserve Bank of India (RBI) has clearly stated in the policy that it will continue to fight inflation and will be prioritise taming inflation over growth at current juncture. The 50 basis points hike clearly demonstrates that RBI is trying to tackle inflation head-on.

It is difficult to predict whether interest rates will peak-out from hereon; we believe that for the next six months interest rates are likely to remain at elevated levels.

How much more hike are you expecting in the current calendar year?

We might see a hike of 25 bps in the next policy which is in June. I?m not sure if it will be 75 bps for the financial year. We have to also look at commodity prices which have seen some softening with crude oil and metal prices coming down.

Do you see the liquidity situation easing soon?

Domestic liquidity is comfortable right now. It’s much better than what it was in the last quarter. But it will remain negative. I think till the inflation comes under control, the central bank would like to keep the system in negative. I think for the first half of the financial year we are likely to see tight liquidity conditions in the market. Also we have to look at credit growth; last financial year it was 22% and deposits were 17%. this year RBI is saying that they expect deposits to grow at 19% and credit to grow at about 21%, so it will still remain negative as deposits will grow slower than credit, but the gap which was 5% last year will come down to 2% this year. If interest rates keep rising we might see some moderation in credit growth. Also deposit growth might be strong as last year the bank had raised deposits rates gradually whereas today most banks are giving interest rates which are at the highest levels; they will be mobilizing a good amount of money on deposits and credit may moderate this year.