If things pan out as per expectations, the repo rate may come down to 7% by 2015-end, says Dwijendra Srivastava...
If things pan out as per expectations, the repo rate may come down to 7% by 2015-end, says Dwijendra Srivastava, CIO-Debt, Sundaram Mutual Fund, in an interview with Chirag Madia. Excerpts:
What are your expectations from the next RBI policy?
We don’t expect any cut in the repo rate right now. However, by the year end, if everything goes as per expectations, (RBI governor) Raghuram Rajan could bring it down to 7%. Having said that, it’s difficult to say when he will cut the rates. We shouldn’t judge the RBI governor on a policy basis. The previous reduction was more in the context of a weak economic growth and, even globally, central banks were easing rates. What RBI has done is to impress upon the government to bring down the fiscal deficit and, simultaneously, curtail the aggregate demand to match supply. I think while Rajan will hold the rates on April 7, a rate cut could still happen outside the policy as the last two cuts were more like playing ‘catch-up’ — the rupee has been the best performing EM currency over the last one year. So, while we believe that another 50-75 bps of rate cut is going to happen in next nine months, it’s tough to predict a timeline.
We believe that as the liquidity coverage ratio has kicked in for banks from January 2015, RBI has already embarked on the rationalisation of SLR, which is likely to continue as, we believe, CRR can be lowered from the current levels.
Given the overall scenario, how do you look at the performance of debt markets? Also, where do you think bond yields will settle?
Because of global factors, we don’t foresee any major impact on yields. Our view is that the benchmark yields will remain range-bound for now and, eventually, go down. At this point of time, debt markets will give normal returns and, if we see a cut in repo rates, long-term funds will benefit. The only negative factor could be slowing of global inflows. The 10-year G-Sec will probably settle anywhere between 7% and 7.25% in the next 2-3 quarters. But if we see any further disinflation, it might even go below 7%. But once the cut in the repo rate cycle comes to an end, it will hover around 7.25-7.4%.
What kind of increase do you see in coupons of corporate papers?
In the last few months, there has been a huge interest from FIIs for Indian bonds. But now that the investment limit on government securities is about to get exhausted, the other option is corporate bonds. FIIs understand that REC or PFC bonds are akin to 10-year government bonds and, if they get an extra spread of 30-40 bps on such papers, it’s an attractive proposition for them. Historically, the long-term spreads between 10-year government securities and corporate bonds have been 80-100 bps. But now they are ruling at 20-40 bps and, I believe, they will continue at such levels for some time.
What, according to you, are the key risks in 2015?
If there is a sudden spurt in economic growth, or even sustainable recovery, in the US, Europe or Japan, there are chances that inflation might go up again. Second, a rise in crude oil price is a key risk as lower oil prices give us a lot of leverage.
Your advice to investors?
For those opting for debt funds, duration funds are a good option if the investment horizon is 12-18 months. However, note that such products are quite volatile. If your risk appetite is low, you may go in for short- and medium-term bond funds, or even dynamic bond funds.