India is the only country where FIIs were able to exit easily and with least impact cost, says RAHUL GOSWAMI, CIO FIXEDINCOME, ICICI PRUDENTIAL MUTUAL FUND.
Will interest rates fall further, given the concerns about FIIs pulling out of Indian bonds and the weakening rupee?
I agree that the rupee has taken quite a hit in recent weeks against the dollar. Not just India, several emerging economies such as Indonesia, South Africa, Thailand, South Korea, Brazil, Russia and South Africa have all seen their respective currencies lose ground against the dollar. A key reason for this sell-off is that the dollar itself has strengthened globally against all currencies. Also, the fears of dollar liquidity shortage led to emerging market currencies being adversely affected as a result of sell-off in both the bond as well as equity markets. So, it is a global phenomenon. India is one of the best fixed-income markets to operate in and also exit with least impact cost.
My counterparts in trading houses indicated that India is the only country where FIIs were able to exit easily and with least impact cost. They could not pull out from other countries so easily. So when the reversal in trend comes, India is likely to be the first beneficiary.
Inflationary expectations, growth and current account deficit are important aspects that get considered by the RBI while it decides on rate cuts. We feel that inflation will be lower than the RBI’s expectation of 5.5 per cent for FY14. It will be a challenge to grow at the estimated rate of 5.7 per cent. Now, with improving data on trade deficit, we feel that incrementally, it will not have any adverse effect on the rupee.
Looking ahead, rupee appreciation seems more likely than depreciation, assuming nothing adverse happens globally. So we estimate a recovery of 3-5 per cent over the next 3-6 months. We believe there is scope for 50-75 basis points rate cut over this financial year.
Have the bond markets factored in the anticipated rate cuts?
The rate cut cycle is going to last for a long period of time. Over the next 2-3 years, we feel that the central bank will be in monetary easing mode. So we feel the duration fund will be the ideal product to invest in from a savings perspective.
How are gilt funds likely to perform, given that they have rallied smartly over the past one year? Are they a good option for investors?
In the last one year, gilt funds have rallied and yields are down by 80-90 basis points. While it is difficult to predict markets, we believe that gilt funds should be able to deliver better returns than term deposits and short-term funds over the next 12-18 months. It will protect investors from re-investment risk.
Should investors look at dynamic bond funds or is it better to go with gilt funds?
The dynamic fund that we manage typically runs in the duration bucket of 1-5 years, whereas the gilt funds track the 10-year yield or the Crisil Long Term Bond Index. So, it may not be a fair comparison. But we would suggest dynamic bond funds to retail investors since the product mandate allows the fund manager the flexibility to take active calls on duration based on risk and volatility.
Will Fixed Maturity Plans come back?
FMPs have their own market. If you want to reduce your re-investment risk in one go, you would typically invest a lump-sum in them for 1-2 year periods. They will regain momentum.
What is the price risk for a gilt fund investor entering the market now?
If the investment horizon is not very short, we feel there will be not be any significant price risk. We don’t feel that the yields have bottomed out.
