Investors can lock into current interest rates

What's the outlook for interest rates now that the Budget has announced some big bang measures for the debt market? Mr Ritesh Jain, Head, Fixed-Income, Canara Robeco AMC and Mr A. Balasubramanian, CEO, Birla Sunlife AMC, two seasoned experts in fund management, share their take on the interest rate outlook with Business Line.

With the moderation in government borrowing proposed for the coming fiscal what is your expectation on interest rates?

If the government sticks to the number they have budgeted for, the interest rates on an average will be atleast 25-50 basis points lower than the current levels. The yields may hover around 7.5-7.75 percent on an average for an entire year, if the government sticks to this number.

But I don't think these numbers are realistic given that over the last five years, government has spent on an average 15 per cent more than the previous year. This time the expenditure growth budgeted is only 3 per cent. This seems to be under-reported.

There are a lot of subsidies and there is uncertainty about the numbers which they have presented. Often the government goes to the parliament for the supplementary grants. If this happens, it is the same as budgeting for a higher number now. So the fall in yields is possible only if the government adheres to the fiscal targets.

What kind of policy intervention do you expect given that the Finance Minister has put the onus of reining in inflation on RBI?

Rates will be hiked further as they are a function of inflation. Now the inflation is more generalised.

Even if the current inflation is due to the global prices, if you don't curtail the demand, your current account deficit would go up which would be bad for the economy.

So the RBI has to curtail the demand even if these are supply side issues. If you cannot do anything on the supply side, will you allow this inflation to remain in the system? As a prudent central banker, the RBI governor has to curtail inflation. So, by March, a minimum of 25 basis points will be hiked. And then another 25 basis points in the month of May. Then a call may be made based on the circumstances prevailing then.

Have the deposit rates peaked?

I think we are at 80 per cent of the peak and the rates may trend up a little in the month of March. If the rates remain at such high levels for a long-period of time, the economy will slow down on its own.

I think the three month and the six month rates will start cooling off in the first week of April but in a one-year bucket the rates will not fall much. Because you will have negative real interest rates.

Three and six months rates are a function of liquidity, once the liquidity eases these rates will moderate. However, one year rate clearly is a function of inflationary expectation.

So one year rates will not fall by more than 25-50 basis points.

Do you think current deposit rates are attractive enough for depositors to lock-in?

It's a good level to lock-in because if deposit rates are 10-10.5 per cent for longer period of time, the high interest rate regime will slow down the economy. Once the economy slows down bank deposit rates too will fall. Depositors can lock-in at rates prevailing in the month of March.

What is your view on the short term and long-term yields (yield curve)?

If the yield curve is flat, long-term rates will obviously react to the government borrowing programme and short-term rates will come down.

So there is a steepening of the yield curve. In corporate debt also, short-term rates will come off a little bit in month of April.

How different is the current interest rate uptrend compared with 2008?

There is only one difference. Last time around, the government had huge fiscal surpluses. The Government's balance-sheet was in very good shape. So, whatever happened, the government could take a hit on its balance-sheet.

This time, it is not in a position to take a hit. This Budget doesn't allow us to take a hit. Achieving the current fiscal deficit is also a little unrealistic.