If inflation is controlled at 4% levels, there is a scope of one rate cut in the next financial year, says Dwijendra Srivastava, chief investment officer -fixed income, at Sundaram Mutual. In an interview to FE, he says investors can look at short-term debt funds and low-duration funds. Excerpt:
What are your expectations from the forthcoming RBI policy?
There is ample liquidity in the market, so we don’t expect any major announcement on liquidity by the RBI. However, we expect the RBI to acknowledge changing its stance from ‘calibrated tightening’ to ‘neutral’, which means that they can move either side (possibility of interest rates cut and even hikes) depending on what is the incoming data. Even some of the global development have softened in the past few weeks. Earlier, we saw the Federal Reserve looking to hike rates, but now they have shown intent they can hold the rates at current levels. Growth is China and some of the European countries is slowing down and these things definitely don’t call for hiking the rates or giving a hawkish stance. Probably the central bank could highlight the risk of higher fiscal deficit and higher borrowing of the government.
From the changes in the policy rates, I expect status quo in the coming RBI policy. One of the reasons for the pause is that it is uncertain how the Monetary Policy Committee (MPC) would look at the headline inflation numbers. Even if we look at the interim budget it was bit of expansionary, farmer-loan package that is giving money in the hands of farmers; it means more expenditure and more consumption from the people which can be inflationary. But the good part is that that this comes at that time when inflation is in the lower band, probably going forward, even if it rises it can be contained.
In such a situation, where do you see interest rates moving, going forward?
If the present government continues and if inflation is controlled at 4% levels, there is a scope of a 25 basis cut in the next financial year as they have been good at managing supply-side inflation. So, at this point of time, I only foresee one rate cut in the next financial year.
What is your outlook on the debt markets?
India has one of the highest real rates returns and once the event risk (general elections in India) is off the table and what kind of government formation takes place, we can see inflows coming back into India in both debt and equity from foreign portfolio investors (FPIs). In this kind of environment investors having longer investment horizon, can move up the curve because the gap between overnight liquid and one year duration product is almost 60-70 basis points (100 basis points=1%). Investors can look at investing in products like liquid funds, short-term debt funds and low-duration funds at this point of time.
Where do you think the benchmark bond yield will settle and what are the key risks?
The new 10-year bond, which is trading at 7.38%, can be in the range of 7.40-7.50% levels, going forward. Having said that, in the next two or three months, if the political event risk is over and if we see more stable money flows into India, then the yields can be in the band of 7.25-7.35%. The major risk in India currently remains that if there is a fractured mandate and no clear cut-fiscal policy, it will lead to a little uncertainty.