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Virendra Verma
Neha Kapoor

MUMBAI, Sept. 1

DEBT market is still providing attractive returns, though this trend is unlikely to be sustained in the near future given the rising forex reserves and stabilisation of interest rates in the country.

Speaking to Business Line, Mr Sandesh Kirkire, Head Debt Funds, Kotak AMC, discussed market trends and other issues including the fact that the fund has shelved its new scheme, Kotak US Treasury Fund, due to a fall in interest rates in the US as well as appreciation of the rupee against the dollar.

Excerpts from the interview

Your fund had filed a new scheme with the Securities and Exchange Board of India for investing in US debt market? What is the status of the scheme?

The Kotak US Treasury scheme has been shelved for the time being as there is no charm in investing abroad until the rupee-dollar volatility subsides. The yield on the ten-year paper in the US has fallen and the five-year paper is trading at lower levels.

Earlier, when the scheme was decided upon, there was a possibility of giving returns of 8 to 9 per cent at least, which compared well with the RBI bonds returns at the time. Under the current scenario, it is not economical to invest in the US debt market.

What kind of returns can one expect from debt schemes, which gave excellent returns last year?

Last year was an unusual year for the debt market, when interest rate fell drastically. In the current year, the returns are in double digit. However, we do not see such returns being sustained in the near future.

Why is it so?

We did a study recently and found that corporates have been borrowing less over the years. They are borrowing less even for working capital; and in some case, working capital is negative. This shows that Indian companies are becoming more efficient. Hence, we may see an industrial recovery, but not a large off-take in credit. In such a situation, interest rates are bound to go downward, but to what extent is debatable. Even so, the fall would as much as last year.

What is the reason behind the increase in forex reserves and given the current level of reserves, do you see a further appreciation in the rupee?

The interest rate difference between India and some major economies is still high. This has led the world using India as a dumping ground for money. To overcome this we need to get an interest rate parity established, though at present there is excess supply of dollars in the market. Moreover, major international currencies have appreciated by over 10 per cent against the dollar while the rupee has gained by just one per cent. Under normal course, the rupee should appreciate further, but due to RBI intervention — to keep our exports competitive — the rupee is not appreciating.

With strong forex reserves, is India ready for capital account convertibility?

For full capital account convertibility (CAC), you need fiscal stability and strong forex reserves. As of now, we have huge forex reserves, but there is no fiscal discipline. Full-blown CAC may not be an immediate possibility given this situation.

Are you planning to launch any new debt schemes in the near future?

We pretty much cover the entire gamut of debt offering, but in future we would look at launching a balanced fund where risk is managed. However, we would have to wait for an upturn in interest rates to launch such a product with investments in floating interest rate instruments.

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