RBI may maintain a status quo on key rates until there is a sustained decline in headline consumer price inflation, says executive VP & head, fixed income, DSP BlackRock Mutual Fund, Dhawal Dalal. RBI?s current monetary policy will succeed in lowering headline inflation in medium term, he says. In an interview with Ashley Coutinho, Dalal says investors could consider income funds with a 12-18 month horizon. Excerpts:
Fund managers have been expecting rates to fall for quite some time. How do you read the trajectory of interest rates in the coming months?
We expect the Reserve Bank of India (RBI) to maintain interest rates at the current level for some more time and consider a reduction in the repo rate only after a sustained decline in the headline consumer price inflation (CPI). The recent decline in headline CPI was pre-dominantly driven by a decline in the food price inflation in last three months. We believe food prices are likely to stabilise at current levels. Moreover, food prices in global markets and the monsoon will have a greater bearing on the food prices over the next six to nine months.
Do you see the rupee strengthening or weakening going forward?
We expect the rupee to remain range-bound between 60 and 63 against US dollar in the near-term. We believe RBI may prefer maintaining the rupee in this range as it may support India?s nascent recovery in exports. This will also help reduce undue currency volatility and may aid in attracting higher capital inflows.
Will inflationary pressure ease any time soon?
We believe there are two major upside risks to inflation, one coming from food prices and other from the manufacturing sector. On food prices, we are observing the impact of the upcoming monsoon on food price inflation. As for manufactured products, we have observed that a lot of manufacturers don?t have adequate pricing power and are generally absorbing a bulk of increase in input costs. Moreover, a higher capacity utilisation rate in the industrial sector suggests an upside risk to wholesale prices due to supply-side constraints. Having said that, we are not worried about the trajectory of inflation as we believe RBI?s current monetary policy will succeed in bringing down the headline inflation as well as a reduction in inflationary expectations in the medium term.
Debt fund managers faced a tough time between July and September last year due to RBI’s unexpected actions? What are the lessons you, as a fund house, have taken from this?
A sharp increase in the volatility in interest rates between June and August, 2013, on account of a sharp decline in the rupee due to a sell-off in EM bonds by FIIs has underlined the importance of paying attention to external factors and their impact on financial markets. We had anticipated some selling in EM bonds and currencies early last year. Based on that view, we had begun to reduce risk from our fixed income portfolios in the first half of 2013. Going forward, we will have to keep an eye on important global factors including geo-political risk and try to comprehend their likely impact on markets.
Which debt products you expect to do well in coming months?
Liquid Funds had out-performed all other fixed income asset classes in 2013 amid the rising rates in the year. Going forward, we expect income funds to do well in next 12 to 18 months as we are confident that RBI will succeed in containing inflation (CPI) and inflationary expectations. Moreover, we believe the interest rate cycle in India is closer to its peak. Investors investing in corporate bonds maturing between 2 and 5 years are likely to do well as investing at current levels will not only provide investors with a reasonable accrual due to higher yields, but also a possibility of price appreciation in case of a sustained decline in interest rates in next 12 to 18 months. Based on all these factors, we believe the investors should start investing in income funds in a gradual manner with an investment horizon of 12 to 18 months.