The new 10 year government bond is unlikely to trade above 9% in the near-term says Dhawal Dalal, senior vice-president and head fixed income at DSP BlackRock Mutual Fund. In an interview with Chirag Madia, he says the old 10-year bond will settle down anywhere 10-15% basis over the new one.
Where do you see interest rates going as inflation remains at elevated levels?
Interest rates are closer to their peaks. The RBI has clearly articulated in the October Credit Policy that if inflation doesn?t go up then they may not hike interest rates in the December credit policy. We believe inflation is likely to trend down gradually unless there is a major shock on the supply side. While positive base effect will keep inflation in check, we also have to monitor components of the inflation to ensure that it follows desired path. In the current environment, the factors affecting interest rates outlook are volatile external environment and prospects of deterioration in the fiscal deficit. Market participants expect the fiscal deficit to go up from the budgeted estimate of 4.6%. As long as fiscal deficit remains below 5.5% and external environment does not exhibit high level of volatility, interest rates should remain range-bound with declining bias in the medium-term.
Where do you look at the 10-year benchmark yield?
The RBI is auctioning a new 10-year benchmark bond this Friday. We believe that it may cut-off at around 8.75-80%. If one looks at the history, whenever there is an introduction of a new 10 year benchmark, market tends to pay premium for that. This premium could be as high as 15-20 basis points over the old benchmark 10 year bond. Based on demand-supply outlook, we believe that the new 10 year government bond is unlikely to trade above 9% in the near-term. We believe that old 10-year bond will settle down anywhere 10-15% basis over the new one. On the downside, we feel that 10 year can probably come down to 8.40% levels from the technical perspective.
Where should investors put money at this point of time?
Investors are advised to look at their risk tolerance levels before investing in the fixed income funds. We believe liquid funds as well as liquid plus funds, which invest in high quality debt and money market assets, are suitable for a risk-averse investor, who is seeking to invest for a short-tenure. Beyond that, if the investors wants to invest for a period of six months or so with little risk appetite then short term income funds may be suitable for them. For sophisticated market participants who understand market dynamics, investing in gilt funds may be suitable given our positive medium-term outlook on interest rates.
There are always fixed maturity plans (FMPs) to choose from. We also believe that investors should consider investing in monthly income plans (MIPs) and balanced funds at this point in time as both equity markets and bond yields are attractively valued. A combination of both of them may gives investors great entry point for an investment horizon of 12-18 months.
Do you think saving account deregulation will hit the inflows into liquid schemes?
Our understanding is that retail participation in liquid schemes is less at this point in time. Only three banks have announced an increase in the savings bank rate.
Unless a majority of banks revise savings rate, we don?t see dramatic change in the near term.
What kind of returns are expected on the corporate papers and is there enough supply in the market.
If we look at the term structure of interest rates of corporates bonds such as AAA rated PSU and AA rated NBFC, there is relative value in some of the select NBFCs papers maturing between 2-3 year, which are yielding between 10.20%-10.3%.
