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Mr Chaitanya Pande, Co-Head Fixed Income at ICICI Prudential AMC, currently manages 13 funds. With 13 years of experience in credit analysis and portfolio management, he spoke to Business Line on the macro economic issues that are having a bearing on market sentiment and direction currently.
On cost of capital
In general cost of capital is going up. Most of the lending is happening around 11-12 per cent. ECB as a source of funding has halted slightly because of the Egypt crisis. Companies with high fixed rate debt would not be affected as much as the ones with floating rate debt because there would be no re-pricing.
On interest rates
The market has factored most of RBI action, that is, around another 100-150 basis points hike. The RBI might ease liquidity but raise rates. One year certificates of deposits are already close to 10 per cent having factored in the rising interest rate regime. Inflation perception still exists.
On inflation
There is no straightforward solution to this. With Government spends targeting the lower economic strata, they start earning more and spending on high quality food. Add to this global commodity inflation and we have a monster called food inflation. Input costs for manufacturing have gone up.
The fact is the RBI cannot slow demand by hiking rates forever as it affects manufacturing more than the services sector. But State elections are a factor to consider and might pressurise RBI to go in for a rate hike. Only 10 per cent of inflation can be attributed to oil, there is a problem only if oil prices stay at or above $120 a barrel.
On oil prices
Diesel cannot be hiked at least until State elections. Petrol will be hiked again some time in March. There might be some cut in customs duty and some issue of oil bonds. But the major issue here is to bring down hoarding. For example, had onion exports been banned in November such a situation would not have occurred in January.
Oil is a perpetual problem and only new oil discoveries can temper it over time because consumption will increase with GDP.
On rupee
There will be some amount of tanking in the USD/INR, if crude goes down. But then it is a vicious cycle also dependent on the direction of FII flows.
On yields
One year CDs are close to their peak at around 10 per cent plus or minus 20 basis points. With inflation at 9.5 per cent PSU bank CDs still give a positive carry of 50-70 basis points.
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