Amit Tripathi

Even as global commodity prices continue to moderate ? crude prices have declined 5% this month ? experts believe that risk of oil declining further is limited as Saudi Arabia, the largest supplier, can control supply to manage prices. Gold price, too, came down significantly in the last two days ? almost 8.9% ? largely due to sell-off by exchange-traded fund (ETF) holders. The price is now at a level where physical buying and longer-term holders will step in to get a bargain, but that may be more than offset by ETF selling.

Lower oil and gold prices are the best news from India?s perspective. They contribute significantly to our import bill. So, lower commodity prices will help narrow our current account deficit. This is already getting reflected in our wholesale price index (WPI) inflation as it correlates more to global commodity prices.

Lower mineral and fuel prices and softening of food prices helped bring WPI inflation to a tad below 6% ? a 40-month low and even lower than RBI?s estimate of 6.5%. Core inflation continued to remain below RBI?s comfort level due to fall in demand. A point to note is that the January final WPI price was sharply revised to 7.31% from 6.62% announced earlier. This is due to incorporation of LPG price hike and might be a one-off factor. The consumer price index (CPI) inflation moderated to 10.4% in March from 10.9% in February. But the divergence between WPI-CPI might continue due to higher weightage of food in CPI. There exists a vicious cycle of rising minimum support prices, food prices and rural wages. The gap between WPI and CPI might continue against the backdrop of high food prices and low commodity prices.

Based on the recent development, we maintain that the possibility of a rate cut by RBI has gone up during its policy meet on May 3. However, we do not expect RBI to go in for an aggressive rate cut. We need to remember that last year in April, RBI cut repo rate by 50 bps after WPI inflation in March 2012 came in at 6.89%.

But later the number was revised up to 7.69%, almost 69 bps above RBI?s projection. So, RBI will be cautious and continue to move in baby steps. We believe RBI will support growth as inflation remains within this range and government continues in the path of fiscal consolidation. If the government starts to spend more as we move closer to election, then the room for RBI to support growth may be limited.

We maintain our investment strategy. The bond market had already rallied on expectation of a rate cut. We expect that RBI will continue to support growth as inflation stabilises, CAD narrows, growth remains muted. This may help keep a lid on bond yields despite continuous supply in coming weeks. We foresee supply easeing considerably by end of second quarter on large maturities. We intend to continue carrying duration in our duration schemes via various instruments like G-secs, corporate bonds, state development loans (SDLs) and money-market instruments so as to take benefit of an absolute fall in yields as well as to take benefit on changes in spreads in various asset classes like SDL and corporate bonds due to demand supply dynamics.

RBI had reiterated that it will continue to actively manage liquidity through various instruments, including OMOs, to ensure adequate flow of credit to productive sectors of the economy. Liquidity might tighten in May and June going forward. Since CRR is already cut significantly and is at record low of 4%, the room for more CRR cut is limited. So, we feel OMOs will be the preferred tool of liquidity injection. Weak macro parameters, OMO announcement and favourable demand-supply dynamics may support the market going forward. We remain structurally bullish on duration and will change our investment strategy as opportunity arises along the yield curve.

* The author is head of fixed income, Reliance Capital Asset Management