Most of the yield volatility is behind us due to the normalising policy-rate corridor between repo and MSF rates, believes Lakshmi Iyer, head, fixed income &
product, Kotak Mutual Fund. In an interview with Ashley Coutinho, Iyer says food inflation is unlikely to moderate sharply in the coming months. Edited excerpts:
How do you foresee the movement of bond yields in the near term?
I think most of the yield volatility is behind us. The normalisation of policy-rate corridor between repo and MSF indicates that. As a consequence, the yields are expected to remain range bound. Any further movement in yields may largely be in anticipation of a more gradual policy change and debt supply outlook.
How do you read the trajectory of interest rates in the year ahead?
We maintain that we are not into a rising interest rate scenario. Fragile growth prospects are something which would continue to play on the central bank minds too, thus, preventing aggressive monetary tightening. With the limit enhancement in 7-day and 14-day repo to 0.50%, NDTL implies additional liquidity of around 20,000 crore available to the banking system. This, in fact, implies lesser reliance on MSF, thereby, attempting to reduce the overnight rates.
Do you think inflationary pressures are behind us?
Not yet. Despite a good kharif season, the money velocity in the agri-sector may be imposing a high price floor for the agri commodities. As a result, the food inflation may not moderate sharply. Moreover, the full impact of import inflation usually transfers with a lag. As a result, the high purchase cost of crude oil during May to August period is still to entirely reflect in the domestic prices. To add to that, the onset of the festive season is bound to increase the seasonal demand pressure.
What do you make of the measures taken by the RBI governor in the last policy?
RBI policy stance reflects the balancing of the dilemma that India faces today. That is, the stubborn CPI inflation and the increasingly regressing GDP growth. While the recent policy measures were in line with market expectations, the policy lays emphasis on the fact that inflation in India continues to be a challenge. RBI has lowered its growth projection, but still expects a modest recovery. We expect growth to be weaker in FY14 against RBI?s 5% expectation, as weak domestic demand offsets tailwinds from better exports and agriculture. Also, raising inflation projection suggests that even as food prices are likely to come off in the months ahead, the second-round effects of higher food and fuel prices due to elevated inflation expectations could likely keep overall inflation elevated. This is clearly a cause for concern. Having said that, the normalisation of MSF policy, which is presently the operational rate, has actually softened the cost of borrowing.
Do you see rupee strengthening going forward?
The policy purpose of RBI was not to strengthen rupee but to smoothen high volatility in the forex market. The resurgent strength in the rupee was on account of delay of QE tapering, better trade data, moderation in crude oil prices and incentivisation of NRI deposits. Going forward, rupee is likely to trade in a range and would react to the factors mentioned above unless unforeseen systemic shocks force a sudden direction.
Which debt categories are expected to do well in the coming months?
With the increasing flattening of the yield curve and moderation in the near-term rates, the short-term duration funds are expected to do better in the next 6-9 months. However, the market expects the monetary policy to go benign once inflation peaks. This suggests that long duration funds may begin to perform well over a 12-18 month time.