The Hindu Business Line : `Inflation no immediate cause for concern'

For Mr Sameer Kulkarni, Fund Manager - Fixed Income, Fidelity MF, the current levels of inflation appear acceptable. Ask him why, and he alludes to the 8 per cent-plus growth rate recorded by the Indian economy.

Here, in this interview, he also brings up an issue that investment circles have been discussing in somewhat muted tones: An appreciating rupee, which is likely to render short to medium term debt a fairly decent investment option for the FIIs that are looking for attractive returns in dollar terms.

Excerpts:

Inflation, as the latest indications suggest, is suddenly a bigger concern than what may be considered normal. How do you view this development?

Yes, at the moment we seem to be in a phase marked by rising inflation. However, the Reserve Bank of India has indicated confidence in maintaining the average level between 5 per cent and 5.5 per cent.

Let me tell you that there is little doubt that lower energy prices will help in easing the pressure on inflation. In that context, it does not seem to create an immediate cause for concern.

With the country's economy growing at more than 8 per cent - in fact, you should check out the latest growth figures - the current levels of inflation appear acceptable.

Now, if the oil prices reverse the trend on account of a weaker dollar and global economic growth or if the rupee does not appreciate as it is widely expected to, imported inflation will have an adverse impact. Additionally, managing liquidity will be very challenging in such a situation.

Does a further rate hike, may be in the next quarterly review in January, look like a possibility? Or, does this seem unreal at this juncture?

The central bank's pre-emptive stance, as indicated in the last couple of policy announcements, and the possibility of point to point WPI crossing 6 per cent on a lower base last year increases the probability of a rate hike in January 2007.

RBI's policies in the recent past seem to have been influenced by global developments. It has indicated concern about an asset price bubble and high credit growth.

But if these factors are within RBI's comfort zone in January, we may not see the action on the rate front. Mind you, a possibility of the band between repo and reverse repo increasing further cannot be ruled out.

How are mid-term debt funds poised at the moment?

You will have to remember that a combination of higher liquidity and higher inflation has increased the steepness of the yield curve at the short end as the market is trying to factor in the possibility of a rate hike.

The accruals in short to medium term debt funds have gone up as a result of this. And hence, these offer protection against the rate hike for a medium term holding period.

An appreciating rupee is likely to make short to medium term debt a smart investment option for Foreign institutional investors as such a strategy might yield attractive returns for them in dollar terms.

This could flatten the curve after the January policy announcement, thereby benefiting current crop of investors.

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