With the consumer inflation (CPI) dipping to 6.46 per cent in September, do you think there is a case for rate cuts in the future?

I don’t think one data point is enough to guide the RBI’s policy action. A rate cut now will be counterproductive, because the economy is slowly picking up. Bank credit growth is at a five-year low. Banks are flush with money and even after cutting deposit rates, they are sitting on a lot of funds. This is also the year when banks have seen their NPAs rise substantially. So credit growth is abysmally low, NPAs are alarmingly high and there is excess liquidity; cutting rates would not serve any purpose at this juncture.

The RBI governor will wait for more data points and a consistent fall in inflation before cutting rates.

So what does this mean for the bond markets? Interest rates appear to have peaked, but there is no clear sign as to when rates will trend lower…

Yes, there is no clear signal for now. But it is also true that the RBI cannot have a tight monetary policy for long. Let us assume that inflation starts to come down and the RBI still does not cut rates. This will result in real interest rates shooting up and there will be a spurt of flows into the country. This will once again lead to inflationary pressure and sharp movements in the rupee, which the RBI clearly doesn’t want.

So inflation, currency and interest rates are all inter-connected and one or the other has to give away. Government fiscal deficit is coming down and if inflation also comes down, then the monetary policy cannot remain tight.

With the ECB cutting rates and the US more cautious to raising rates, the RBI cannot remain tight-fisted for long.

What are fixed income investors doing now?

For investors looking to park money for less than one year, liquid funds have performed very well in the last four to five years, particularly in the last one year. So, corporate investors will continue to invest in these funds.

However, post the Budget, there has been an increase in dividend distribution tax. This may impact returns for these investors by 40-70 basis points.

Also, with the tax advantage on Fixed Maturity Plans (FMPs) going away, corporate investors who were investing in liquid funds or FMPs are now investing directly in certificates of deposit (CDs) and Commercial Papers (CPs). HNIs, on the other hand, are now switching to equities.

For investors in the three years and above category, nothing much has changed. Returns are still far superior to bank deposits, thanks to indexation. Corporate bond funds, for instance, deliver very good returns. We have seen a lot of inflows into our corporate bond fund — IDBI Debt Opportunities.

What is the strategy you adopt for your bond fund?

We launched the IDBI Debt Opportunities, our corporate bond fund, in the month of March. We follow an accrual strategy — buy and hold securities till maturity. We look for good AA-rated securities. We have about 58 per cent invested in AA+/AA/AA-rated bonds.

What about gilt funds — what is the duration you maintain in your gilt fund?

IDBI Gilt Fund has a duration of around 12 years. So we are very positive on interest rates. Some other mutual funds have very high duration of 20 years or so. When compared with them, we are still a bit more cautious.

Why has your ultra short-term fund underperformed other funds?

We follow a more conservative strategy than other mutual funds. We have invested in securities having less than one-year maturity — about 30 per cent in less than three-month CDs, 5-30 per cent in six months to one-year CDs.

Other mutual funds, invest in one- to three-year securities. Also, post the Budget, we sold all one-year CDs, because there was no market for it. FMPs that primarily invest in these securities are losing their appeal post the Budget.

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