Amitabh Mohanty,
Fund manager, Alliance Income Fund
What will be the impact of war to be on interest rates ? How will you adjust?
The effect of war will depend upon its duration and the area over which it is carried out. If the war is for a limited duration and the fighting is restricted to areas around Baghdad, we should be largely unaffected.
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A long war could slow down growth. Economic growth may also be stunted if oil wells are set ablaze. At present I do not see any major trouble for economic growth. Oil prices have already come down from the $35 levels they reached a few weeks back.
The war should also get over pretty fast without any major casualties. Therefore, I expect that world economies to be able to tide over the war with ease.
Could rising inflation have an adverse impact on interest rates?
The inflation rate has risen to 5.6 per cent, the highest for some time. However, I believe that this reflects higher oil prices that were prevalent prior to the war. With oil prices coming down, there should be a drop in inflation.
Therefore, I do not expect interest rates to be affected to a significant extent on account of a temporary increase in the inflation rate.
Do you believe that another bank rate cut looks imminent? If so, have you already made suitable portfolio changes?
The prospects of a bank rate cut are bright. The decline in oil prices from $ 35 levels should ease the pressure on inflation rates. This leaves the central bank free to go in for a cut in the bank rate.
Since the RBI has time and again emphasised the need to move towards a soft interest rate regime, we expect there could be a cut. We expect a 25 basis points cut.
We have adjusted the portfolio to take advantage of any movement in interest rates. We have reduced our exposure to cash and increased exposure in government securities to 43 per cent.
The average maturity of our portfolio stands at around 6.6 years, up from 4.5 years at February end. We have increased our positions in government securities before the bull run begins in order to take maximum advantage of price increases.