Managing director of Standard Chartered Mutual Fund, Naval Bir Kumar expects a 25 bps rate hike by the Reserve Bank of India [Get Quote] in the next 3 months.

Kumar also anticipated the 10-year yield to touch 8.5 per cent before a decline. However, he doesn't see the 10-year yield to fall below 8 per cent.

According to him, the rupee is likely to remain weak and ranged in the near-term. Also, income funds are seen to be attractive in a period of six-months. Kumar also feels that by the year-end, most of the rate hikes should be over.

Excerpts of CNBC-TV18's exclusive interview with Naval Bir Kumar:

What is your sense after looking at what the Fed delivered yesterday? What does it imply for our bond markets and income funds from here?

I think, interest rates are still heading up. We definitely forecast another rate hike in India. It is hard to predict when it will happen. It is still not time for income funds. I think we are six months away from income funds becoming popular again.

It is still time to be cautious on the debt side; remain in liquid funds, floaters and Fixed Maturity Plans, FMPs. We should see 10-year yields in India to touch 8.5 per cent before they start to decline. So there's still a word of caution on bonds in India.

In the near-term, what do you expect to see? Do you think because of this relief, which is happening in the market, after the Fed meeting you could see yields soften up to 8 per cent or below that or you do not expect much softness on the yield?

The relief rally is potentially possible but I would doubt 10-year yields going below 8 per cent. On the shorter end of the curve, I see yields tightening if liquidity levels decline from here onwards.

So overall, we expect stable conditions given the latest message out of the US Fed for some time. The next move obviously that the market will look at are our own rate hike expectations. It is becoming hard to predict when the Reserve Bank will do a rate hike. But I think a rate hike is more or less getting priced in.

What is the quantum of the hike that you are expecting from RBI? With that, will they be on par with the other global Central Banks?

Other global Central Banks have been fairly mixed. We expect the European Central Bank to go up again. In India, we can expect another 25 bps hike.

I doubt whether there is requirement for a much larger hike at this stage. If RBI believes inflation is still at risk, we will get another 25 bps thereafter. But I would be very much doubtful getting 50 bps upfront.

How soon do you think we will see that benchmark yield hitting 8.5 per cent; by the end of this year or sooner than that?

In the next three months; I think much sooner than that.

Once we get there, how do you gain the market because 8.5 per cent is pretty much consensus expectation now but some believe that we may not be done there. Interest rate could continue to harden given circumstances and may be they could inch up closer to 9 per cent. You are not quite as bullish on yields as that, is it?

I will be safe here. Even Ben Bernanke has said that he is going to be looking at economic data as it emerges over the next few months to determine policy in the US. I guess the whole world economy is going to look at economic data.

We have Ben Bernanke and the US Fed saying that growth is moderating. From the past statement, which said that growth is likely to moderate; they are accepting that the growth is moderating and inflationary risks are higher. They have been saying timing and extent of further rate cuts will be dependent on economic data.

In India too, quite clearly from all indications that the Reserve Bank has given so far, they are worried about inflationary pressures. They expect inflation expectations to go up. They are worried about certain asset price inflation that exists. We are convinced that there will be another 25 bps hike. If inflationary pressures do not ease off, then one would get another 25 bps thereafter. So 8.5 per cent is consensus, thereafter it will depend as data emerges.

What are you factoring in for the rupee?

In the near-term, I expect the rupee to remain weak; to remain in the range that it's been trading at. But the expectation is that once the hikes are behind you, once we arrive at a neutral rate on interest rates globally, the rupee should appreciate thereafter because India is still a growing economy. We believe that India is one of the few economies that will continue to do well even when global growth does slow down.

You made an interesting statement that this is not the time for income funds yet but it will be, in six months time. What could it be? You are saying that once it gets to 8.5 per cent, people will get attracted and that rate will hold for a bit. What would make it attractive in six months down the line?

What would make it attractive is when RBI and most Central Banks globally change their stance from saying that we are still in the rising interest rate environment to saying that we are now arriving at neutral territory.

Whether it happens when the India 's 10-year yield is at 8.5 per cent or it happens when the Indian 10-year yield is at 9 per cent, is hard to predict. But our belief is that by the end of this year, most of the rate hikes should be behind us.

If not, then you are in a period of high cost environment, you are in a period of very high inflation. That does not look good for the world economy and right now, we are not predicting inflationary pressures to go to the level at least in the near-term to cause the Central Bank governor's to continue to raise rates well into 2007.

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