‘Interest rates have peaked', says Amandeep Singh Chopra

Mr Amandeep Singh Chopra thinks interest rates have peaked. His opinion on interest rates counts — managing as he does, UTI Mutual Fund's Fixed Income portfolio, which is currently a sizeable Rs 40,000 crore.

A graduate from St. Stephen's College, Delhi and an MBA from FMS, Delhi, Mr Amandeep has been with UTI AMC since 1994 and has been responsible for increasing the asset value in some of the select funds.

In this interview, he provides his take on recent debt market developments. And recommends strongly that retail investors start looking at some fixed income products to lock into rates that he thinks are now at a peak. He expects the RBI to pause for a while before any reversal of interest rate direction.

Excerpts from the interview:

Are RBI's open market operations (OMOs) going to be inflationary?

No. The RBI's moves are more of a counter-balancing factor. The tightening cycle imposed by the central bank has increased the deficit in the system as far as liquidity is concerned. This is getting reflected in the net liquidity adjustment facility borrowing every day.

Secondly, the rupee has depreciated. This has been happening partly due to external reasons (Euro crisis) and partly due to our trade deficit. This, combined with dollar outflows because year-to-date FIIs have turned net sellers, has weakened the rupee. Therefore, the RBI has intervened — and when it intervenes it sucks out rupees.

So the OMO is a balancing strategy to infuse liquidity and partly to support additional government borrowing. It is not going to be inflationary in our view — unless there is an excess of OMO — which we don't think will happen.

The RBI is doing it in a calibrated way. Right now, the OMOs are only around Rs 10,000 crore, whereas the net deficit is much higher at around Rs 1.3-lakh crore. It can comfortably undertake a few more OMOs before the threshold of 1 per cent of net time and demand liabilities of about Rs 55,000 crore is reached.

Why did devolvement happen in the recent G-Sec auctions?

There were devolvements because the market was shaken by the large amount of additional government borrowing. The market expected slippage for the full year to be Rs 30,000-40,000 crore. We thought this was manageable. But since the first supplementary grant itself was over Rs 50,000 crore and another was indicated in the current parliamentary session — which was way beyond what we expected — that spooked the markets. And that's why you did not see very good participation in the auctions. That was another reason the central bank had to come in and support the G-Sec market or the 10-year yield would have breached 9 per cent and stayed above.

Have interest rates peaked now?

Yes. In our view, from a long-term perspective (from a 12-month perspective), rates have more or less peaked.

Is this a good time to lock into fixed income funds?

Yes. We strongly recommend looking at bond funds and at short-term income funds. The lead indicators do show that the economy is slowing and that is getting reflected in the data that is coming in.

Most of the economists are further downgrading their GDP estimates for the current and next fiscal. That would indicate that there is less reason to hike rates from now on. Second, recent inflation data have been positive. Both of this will support the central bank moving into a slightly more dovish (or at least less hawkish) stance.

Will that mean we can expect a rate reversal immediately?

The reversal may not be immediate and may not happen as fast as the market thinks it will. We think the central bank will hold out for some more time before it actually reverses its stance, and cut rates and become pro-growth again. Our view is that the RBI will follow the trajectory indicated, and first start indicating a prolonged pause before cutting rates.

Do you see the savings bank deregulation (and increase in a few cases) having an impact on corporate investments in debt?

Not really. Companies cannot anyway invest in savings bank deposits. But what will happen is that the term structure will change. If the savings bank account was getting 4 per cent, then the 7-14-day deposit would be 4.5/4.75/or 5 per cent. But now that the base has gone to 6 per cent in some cases, then the 7-day deposit would go to 6.5-7 per cent. That will be the bigger factor.

Corporates will look at these deposits when compared to money market mutual funds. Again, in term deposits, there is a seven day lock-in — whereas in money market funds, it is one-day money. We still have a superior and flexible product as far as corporates are concerned. So far we have not seen any movement.

But overall, the mutual fund fixed income market itself has been shrinking — partly due to the RBI guideline that asks banks not to invest beyond 10 per cent of their net worth. Lots of banks which had their surplus invested in mutual funs have been withdrawing.

Second, now that the base rate itself is above 10 per cent, those corporates which had their excess liquidity parked in mutual funds would prefer to draw down this surplus. Those who are net borrowers would prefer to use this money (on which they may earn about 8-8.5 per cent) rather than pay over 10-10.5 per cent. That factor may also cause a bit of decline.

What is the duration of your portfolio? How has it changed recently?

The duration of our portfolio used to be about two years till six months ago. That has now changed to 4.8-5 years. Of course, it varies from product to product but this is the weighted average.

Would that indicate that you are taking a contrarian stance to what the market is currently doing (which prefers short-term paper)?

What this indicates is that in our view, there is going to be a softer interest rate regime in future. Then the curve is going to steepen and move downwards as well. One needs to take a 12-month view and then look at these things.

What is your advice to retail investors?

Retail investors have been chasing yields for some time. In view of the slowing economy and declining corporate profitability, we are seeing some shift away from equity funds.

We have been telling investors to take an asset allocation approach and look at products with low volatility but predictable return profile such as fixed maturity plans, short term income funds, etc. We tell them that the composite will give them a better return than locking up funds in any one basket.

COMMENT NOW