Duration funds could do well once inflation eases

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SummaryInflation may start to subside in the coming months as food inflation starts cooling down

Inflation may start to subside in the coming months as food inflation starts cooling down, says Rahul Goswami, CIO — fixed income, ICICI Prudential AMC. In an interview with Ashley Coutinho, he says duration funds are expected to do well in the coming quarters as interest rates begin to come down. Edited excerpts:

What do you make of the central bank’s decision to maintain status quo on key interest rates on December 18?

Market participants were expecting a repo rate hike in the midst of higher WPI (wholesale price index) and CPI (consumer price index) prints for November and were positively surprised on the status quo maintained by the central bank. The decision came in the backdrop of a weak economy and uncertain inflation, which merited a wait-and-watch approach. The key reason for the status quo was expectation of benign inflation prints in the near future. The expectation was supported by recent inflation prints suggesting that headline inflation, both retail and wholesale, have increased, mainly on account of food prices and there are indications that vegetable prices may be turning down sharply.

How do you read the trajectory of interest rates for the rest of FY14?

We expect the WPI to average around 6% to 6.25% through the financial year. GDP growth may remain subdued at around 4.5% for FY14 against the RBI’s estimate of 5% in the midst of weak manufacturing growth. We believe that as the situation on inflation improves, RBI may come back towards easing monetary policy to support growth.

Inflation has remained persistently high for quite some time now. Do you see inflationary pressures easing in the coming weeks?

Manufacturing inflation has remained below 3% for a long time and it is only food inflation that has contributed towards the recent spike in WPI inflation. The recent inflation is attributable more towards seasonal spike in vegetable prices. Vegetable, which has about 1.7% weightage in WPI, has contributed to almost 2% out of 7.5% WPI inflation. There are anecdotal evidences of vegetable prices easing since December and this shall ease inflationary pressures in the coming months.

Do you see the rupee strengthening going forward?

As we have seen improvement in trade balance and current account balance, we feel the risks on currency front have abated and the rupee may trade in a range of 60 to 63 against the US dollar.

Which debt products do you expect to

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