‘Inflation to moderate by 100 bps over next one year’

With inflation proving sticky and growth slowing down, the central bank is unlikely to go in for pre-emptive easing in the interest rate cycle, says Maneesh Dangi, Co-Chief Investment Officer, Birla Sun Life Asset Management.

In an interview with Business Line , Dangi said that inflation could ease by March and hover in the 6-7 per cent range through 2013. The inflation projection is predicated on stable, if not softer commodity prices and continuation of sub-optimal growth conditions in India. This will pave the way for about 75 bps of effective rate cuts by the RBI (through a mix of repo rate cuts and liquidity easing).

What are your views on the interest rates?

We think interest rates will continue to ease. But lending standards will not ease as business conditions will remain under stress. Non-performing loans will continue to rise through 2013, albeit slowly. Growth has slowed down a lot, but we see lower likelihood of a pre-emptive easing by the RBI given that our inflation has proven to be sticky. We expect inflation to moderate by 100 bps over the next one year, averaging at 6.5 per cent. This will pave the way for about 75 bps of effective rate cuts by the RBI (by a mix of repo rate cuts and liquidity easing). The rate curve is likely to be steeper by the end of 2013.

When do you think the RBI will start cutting rates and how will it impact the debt product category?

Rate easing cycle is one-year old and appears durable. Unlike the 2001-03 and 2008-09 easing cycles, the nature and pace of the current rate easing cycle appears to be cautious and slow. The RBI had cut repo rate by 50 bps in April and kept it on hold since then. But it resorted to other modes of easing by adding to the liquidity through liberalising export refinance, effecting SLR and CRR cuts and open market operations. All these actions have had a profound effect, as term rates eased substantially more than the repo rate. A case in point is: one-year CD/CP rates which have come down by more than 150 bps since March 2012. Now, we think the RBI will cut repo by another 50 bps by April. We forecast overnight call money rates to be 75 bps lower over the next one year, which will be achieved by a combination of repo rate cuts and liquidity injection into the system. Easing rates will benefit funds which are sitting on longer duration. But ultra-short duration funds will suffer due to lower rates.

Which debt products would you like to recommend to investors at this point?

We are recommending two categories of funds at this juncture. One, duration funds which are likely to benefit from the anticipated fall in interest rates. Income and gilt funds belong to this category. The second category includes all season funds such as dynamic bond fund and credit funds where our investors expect superior returns across time frames.

Will the demand for fixed income products sustain?

Gilt and income funds tend to perform well when rates head lower. As we believe that rates will ease secularly over the next 12 months, the demand for such products will sustain. In fact, if the growth regime fails to improve and inflation moderates, the downtrend in rates would continue over a longer time horizon.

Apart from such seasonal products, our teams are putting efforts in promoting all-weather funds such as dynamic bonds and credit opportunities funds. These funds promote saving habits, deliver superior returns and relieve the investors from trading and timing the rate cycles. Additionally, assets have tended to be more durable in these funds.

When do you see inflationary pressure tapering off?

We see inflation easing by March. It will range between 6-7 per cent through 2013. Most of this easing is predicated on stable, if not softer commodity prices and continuation of sub-optimal growth conditions in India. We also see a change in growth mix, with relatively higher contribution from investment, taking us to a more sustainable growth trajectory.

sneha.p@thehindu.co.in

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