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Retail investors may not be in a position to understand the intricacies of investing in inflation index bonds (IIBs), which has been introduced by the Government to wean investors from gold.
However, institutional investors such as insurance companies and pension/provident funds could benefit by investing in these bonds, says Dhawal Dalal, Executive Vice-President, Head – Fixed Income, DSP BlackRock Investment Managers.
In an interaction with Business Line , Dalal outlines his thoughts on IIBs, and the likely trajectory of the rupee and interest rates. Edited excerpts:
How do market participants perceive IIBs as an investment product?
It is difficult for market participants to understand how the bond works. My sense is that the participants are not mature enough to appreciate a new asset class.
Having said that, we are seeing new breed of investors, such as foreign institutional investors (FIIs), coming.
Also, IIBs are good for insurance companies, pension and provident funds. It’s a new toy for everyone to play with, but I don’t think people will be jumping up and down to get the toy.
The liquidity, valuation, and taxation, among other things, will be watched. So, everyone will adopt a wait-and-watch approach. For mutual funds, it doesn’t make sense to invest as they need liquidity and instant accrual (of interest). In IIBs, the returns are back-ended.
How receptive will retail investors be towards IIBs?
I don’t see much participation from retail investors as it would be very complicated for them. The Reserve Bank is right in offering it to institutions first.
Which is the right inflation benchmark — wholesale price index or consumer price index?
That’s the debate going on right now. But the moment CPI is taken into consideration, the Government’s borrowing costs will go up. So, while it is a win-win situation for retail players, the Government may lose.
Until CPI comes down to acceptable levels of around 5 per cent or so, I don’t think the Government will consider changing to CPI.
How do you see the rupee trending?
The rupee is under pressure given that the dollar is strengthening globally. It is important to recognise that the rupee depreciation will have an inflationary impact. However, the Government is desperately trying to bring in more capital to finance the current account deficit (CAD).
And if they don’t succeed, then there is a risk that the rupee will continue to depreciate further. It can have both a positive and negative impact. Positive is that our exports can grow, and to that extent it can finance our CAD.
What are your expectations from the RBI?
Infusing liquidity can help, but then our CRR is already low. But interest rates are high compared to a country like China.
So, maybe the RBI could resort to open market operations… Also, inflation volatility needs to be contained. We expect about 50 basis points cut each in the repo rate and cash reserve ratio (CRR) this calendar year.
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