Rates may remain unchanged

CREDIT SEASON'S GREETINGS

Most debt fund managers expect no changes in the Credit Policy.

Given the current macro economic conditions - read benign inflation and adequate liquidity - debt fund managers are not expecting any major changes in the Credit Policy to be announced on April 28.

However, a few do have concerns that global interest rate trends and the strong credit growth may call for a moderate hike in reverse repo rates.

While they note that liquidity management will be one of the key challenges for the Central Bank going forward, there are also worries about high global oil and commodity prices.

Most fund managers admit the fact that RBI is likely to provide further impetus to the development of the Indian debt market. The Smart Investor asked several debt fund managers about their expectations from the Credit Policy. Here are excerpts:

Suresh Soni,
Director and head
(fixed income), Deutsche AMC

Rupee's unlikely to strengthen much

The rupee is unlikely to strengthen much. Current account deficit and the slowdown in FII inflows in the wake of rising US interest rates do not augur well for the rupee. Though liquidity is comfortable in the debt markets, the risk-taking ability of market participants has come down.

There are not enough buyers in the secondary market. Incremental appetite for securities has been absent since trading banks are not participating in the market in a big way. Inflation is also benign at 5.0-5.5 per cent as compared to 7-8 per cent during the last credit policy period. Post-December, there has been a slowdown in credit growth.

My expectation: The RBI may leave interest rates unchanged, given the soft patch in industrial growth and export figures.

Dhawal Dalal,
VP and head (fixed income),
DSP Merrill Lynch MF

RBI may consider credit growth before hiking rates
While the inflation scenario is benign and economic growth is steady, the RBI may consider credit growth, global interest rate trends and the strength in commodity prices before considering a rate hike.

The headline inflation has fallen from around 8 per cent in October 2004 to 5.48 per cent on April 9, 2005. Inflation is likely to remain benign in the next three to six months.

However, a revision in petroleum prices and a below-average monsoon could push inflation higher around June-July 2005. The government has announced a rise in its borrowing programme for H1 compared to last year.

Though there is enough liquidity in the banking system, higher government borrowing may put upward pressure on interest rates.

My expectation: There is about 25 per cent probability of a rate hike.

Mahendra Jajoo,
VP and head (fixed income),
ABN Amro AMC

Inflation is under control
I expect inflation to remain in the 5.00-5.50 per cent band in the near term. Though there would be upward pressure from commodities, consumer durables, primary articles and oil, a rise in inflation last year and the strong base effect would likely offset this. Oil prices would probably remain in the $50-60 range.

We expect the government to continue insulate the domestic economy from higher oil prices. A moderate increase in oil prices may be necessitated if international prices become more volatile.

Considering adequate liquidity, stable inflation and the RBI's objective of supporting economic growth, it will be a very close call for the central bank (with respect to raising the reverse repo rate).

My expectation: We don't expect changes in CRR or bank rates. There might be a rise in the reverse repo rate.

Amandeep Chopra,
senior vice-president and fund manager,
UTI AMC

Government borrowing is a pressure point
I expect the government's borrowing programme in H1 to put pressure on liquidity, especially considering the higher credit off-take expected in FY06 to support the 13 per cent nominal GDP growth and slowing foreign inflows.

With banks above the minimum SLR (statutory liquidity ratio) requirement and little money flowing into the income mutual funds, insurance and pension funds are the only major supporters of the government's borrowing programme. This translates into higher demand for limited savings/resources. Thus liquidity management could be a big challenge.

My expectation: The RBI may continue its focus on price stability (that is, inflation) and maintain appropriate liquidity for growth. However, the central bank may caution the market on global interest rates and oil prices.

Sameer Kulkarni,
head (fixed income),
Franklin Templeton MF

Global interest rates may remain soft
Going by the recent developments in the global markets, the way long bond yields have fallen despite Fed rates moving up, it seems investors are pricing a possible slow down in the years to come.

Moreover, economic data continue to be on weaker and limit the possibility of hardening of rates. In such a scenario, interest rates may not move up much.

We will have to wait and see if the economic growth witnessed in recent years would sustain given changing global conditions and local factors such as monsoons. With US interest rates rising, there could be possible outflows from emerging markets. This, combined with domestic current account and trade deficits, might tone down expectations of rupee appreciation. 
 

HIS FORECAST Vs ACTUALS
(% growth)	For 2004-05
	Projected	Actual
Real GDP growth	6.5-7	6.6
Inflation	5	5.05
Money Supply	14	13.1
Aggregate deposits	14.5	14.3
Non-food bank credit	16-16.5	30.6
Gross fiscal deficit (as a % of GDP)	4.4	4.5
Centre's market borrowing (Rs cr)	90502	91000

My expectation: We don't expect any change in bank and repo rates and CRR.

WHAT HE SAID IN OCT 2004

Policy stance: "The dilemma about the direction of interest rates continues...

"In view of the widespread anticipation that international interest rates may rise, there may be a case for raising policy interest rates.

"A case can also be made out for lowering interest rates to foster investment activity domestically in the given context of capital flows on the assessment that interest rates in large economies may not rise soon or to a significant extent and the risks of inflationary pressures do not materialise.

"Provision of adequate liquidity to meet credit growth and support investment and export demand in the economy while keeping a very close watch on the movements in the price level."