Inflation likely to remain in 7-8% range during 2013

Written by Ashley Coutinho | Ashley Coutinho | Updated: Feb 1 2013, 05:44am hrs
The RBI may opt for one more repo rate cut in April this year before signalling a pause, believes Dhawal Dalal, executive vice president & head fixed income of DSP BlackRock Investment Managers. In an interview with Ashley Coutinho, Dalal says that the headline inflation is likely to remain between 7% and 8% in 2013. He advises investors to invest in high-quality medium and long-duration funds based on their risk appetite for 6-12 months.

What is your reading of the central banks move to cut the repo rate and the cash reserve ratio (CRR) by 25 basis points each

The Reserve Bank of India has taken cognizance of the weak economic growth, tapering of heading inflation as well recent steps taken by the government to address twin deficits. The RBI has acknowledged that while headline inflation is still higher than their comfort zone, a reduction in repo rate along with a CRR cut will likely reduce the cost of funds for the borrowers going forward and may augment the investment cycle going forward. This may, in turn, support the economic recovery.

Do you think the inflationary pressures are finally easing

We believe that the headline inflation is likely to remain between 7% and 8% in 2013. The RBI governor has also echoed the same in his speech after the recent policy meet, wherein he mentioned that he expected the headline inflation to remain at around the current level on average in 2013. While non-food manufacturing prices as well as fuel prices have been trending lower, food prices have remained elevated for some time.

We believe that food prices in India are likely to remain sticky, partly due to higher income growth in rural India as well as the government policy of MSP (minimum support price) for crops. At the same time, the expansionary fiscal policy of the government since 2008 has also contributed in keep aggregate demand at a higher level.

The benchmark 10-year bond yields are currently hovering at about 7.87% pa. How do you see the yields moving in the coming weeks

We continue to expect one more repo rate cut by April 2013. Our base case is that the RBI will pause after that, for the rest of the year, unless there is a major correction in crude oil prices going forward. This should result in the benchmark 10-year government bond yield trending towards 7.70-75% pa in the near-term.

How has the past year been for debt funds

The calendar year 2012 has been decent for debt funds with most categories of debt funds delivering average returns of between 9.5% and 10.5%. Dynamic Bond Funds, which can change their asset allocation quickly, as well as gilt funds have particularly done well due to a decline in interest rates since September 2012.

Which debt products do you expect to do well

We expect one more repo rate cut of 25 basis points by April 2013. After that, we expect the RBI to pause. Based on that, we expect high quality long duration funds to do reasonably well in 2013. We also expect the yield curve to steepen gradually with short-term yields getting adjusted to the new funding rates while long-term yields remaining range-bound depending on supply-demand dynamics.

What is your advice to investors at this point

We advise investors to invest in high quality medium and long duration funds based on their risk appetite for an investment tenor of around six to 12 months. While investing, we expect investors to take into account the funds quality of assets, its risk-management practices, the fund managers views as well as investment processes to get further comfort on their investments.