With interest rates expected to come down, investors should now look at short-term open ended schemes as they could outperform, says Chaitanya Pande, head, fixed income at ICICI Prudential Mutual Fund. In an interview with FE?s Chirag Madia, Pande says yields on the benchmark bond could go up to 8.75% with the high fiscal deficit keeping the mood in the bond markets subdued.
The government has upped its borrowing plans. What is your view on bond markets?
The higher government borrowing was not unforeseen; around R25,000-30,000 crore was expected but the government has increased it to R40,000 crore. The fiscal deficit will be 5.5-5.8% of GDP this year and will remain high next year too because revenues may not pick up and the government is not expected to cut expenditure seriously.
So the bond markets could stay pessimistic next year too. Yields will continue to remain volatile in the next few months since there are positives like expectation of inflation coming down and the Reserve Bank of India (RBI) cutting rates. But the Union budget will be important and till then the 10 year yield is likely to remain in the range of 8.25%-8.75%.
When can we expect the RBI to cut rates?
While the policy clearly indicates a shift of focus away from inflation and towards growth, we are unlikely to see rate cuts this fiscal. Any further growth shocks could potentially lead to a pre-ponement of the rate cuts, though it seems unlikely.
When do you think banks will cut rates on deposits?
We might see some restructuring on the one-year rates and short-term rates in the June 2012 quarter.
But post March 2012, we will definitely start seeing banks lowering fixed deposits (FDs) rates faster than people imagine. I wont be surprised if FD rates come down by 1-1.5% in the next six months.
How do you read the trajectory of interest rates?
For a while we believed that rates have peaked and we feel we can see rates coming off next fiscal. However, there is expected to be some volatility in March mainly due to OMOs. I think the ten year rates might not move much, but short term rates can come down by around 200 basis points.
As a fund manager, how did you manage volatility?
We were expecting some kind of volatility in the 10- year yields since we felt the the deficit numbers were unsustainable. Till August, there were hopes that oil prices would come down but they remained high. Also the disinvestment programme was not picking much. We did not expect the additional borrowing of R52,800 crore in September. But yields moved sharply after the announcement.
What should retail investors do now?
We believe that investors who have so far been looking at fixed maturity of products should now look at short-term open ended funds because as rates come down they will tend to outperform. At the same time, investors who have one to two-year horizon can look at income funds, because interest rates are likely to come down as the government balances the fiscal deficit .