Birla Sun Life sees no rate cut by RBI

The Reserve Bank of India is unlikely to take cue from the US Federal Reserve and cut rate, as the macro-economic situation here is different from the US, Navneet Munot, chief investment officer-fixed income, Birla Sun Life Mutual Fund, said on the sidelines of the fourth International Mutual Fund Summit held in Bangalore Saturday.

He sees gross domestic product of the country growing 8-8.5 per cent this financial year and next.

He expects foreign funds to continue deploying in Indian markets. While the central bank may not hike cash reserve ratio of banks, it would use market stabilisation scheme to check excess liquidity, he said.

Interest rates in the country have peaked, and investors should start looking at long-term schemes, which may give return of close to 10 per cent over the next one year, Munot said.

Birla Sun Life Mutual Fund "� the sixth largest fund house in the country "� had assets worth Rs 27,000 crore under it as of the end of August.

"What the US was going through is completely different from the macro-economic situation in India," he said.

US Fed on Tuesday lowered its target rate for federal funds 50 basis points to 4.75 per cent for the first time since Jun 2003, to 'forestall' the adverse effects of financial market disruption on the country's economy.

The US central bank also cut its discount rate 50 bps for the second time in about a month to 5.25 per cent.

"I think our growth is going to be robust, though there is some slowdown looking at the recent IIP data. But there is fair amount of possibility that economy will continue to grow at 8-8.5 per cent this year as well as next year," Munot said.

India's industrial production growth in July was at a 9-month low of 7.1 per cent as against 13.2 per cent a year ago, and 9.0 per cent in June. RBI pegs gross domestic product growth in the current financial year at 8.5 per cent.

On a possible rate cut by RBI, Munot said, "No, I don't think we are anywhere close to a situation where interact rate will be cut by the central bank. The best case scenario is about RBI not hiking the rates. Such strong growth,... I don't think there is a strong case for rate cut in India as of now."

"With huge capital flows coming into the country, they have to be sterilised. RBI will use various tools. Most likely, they will use MSS bonds. May be if capital flows are too strong, then the possibility of CRR can not be ruled out. That is much less likely, probably MSS will be sufficient for RBI to handle this sterilisation," Munot said.

In its bid to drain out liquidity, RBI has raised cash reserve ratio of banks 200 basis points to 7 per cent since December.

Considering large capital flows, Munot expects the rupee to rise further.

From January until Thursday, foreign funds have invested $10.41 billion (Rs 41,438 crore) in local equities.

"In the near term, it looks like RBI is likely to support dollar at these levels, but in the longer term rupee will be appreciating," he said.

Rupee has appreciated over 11 per cent against the dollar, since January. Munot sees long-term schemes coming back to focus.

"We believe that the bond market will throw several opportunities for long-term funds to generate capital gains apart from having a good current yield portfolio. In current situation, where we believe that we are close to the peak of the cycle in terms of interest rates, it makes sense for investors to allocate some amount of money to long-term funds."

Medium- and long-term debt funds witnessed massive redemption in 2004 as global interest rates and crude oil prices, and domestic inflation rose.

Rising bond yields and subsequent negative returns had taken a toll on these funds.

Subsequently, short-term debt schemes such as liquid, floater, and fixed maturity plans had turned attractive.

"Investors should start investing now (in long-term schemes)," he said.

Munot sees income funds giving 9-10 per cent return over the next one year as interest rates are peaking. Corporate bond spreads are also high, which may result in decent capital appreciation from bonds.

He expects liquid funds to offer 7 per cent average annualised return.

During a year until Friday, long-term gilt, medium-term income, and liquid funds recorded 5.61 per cent, 6.2 per cent, and 7.56 per cent annualised returns, respectively.

Birla Sun Life Mutual Fund would focus on active duration management(changing the tenure according to the interest rate movement), in case of long-term schemes. In case of short-term ones, it would deploy in bonds with six months to one-and-a-half year average maturity.

"In terms of asset allocation, corporate bonds at a spread of 180-200 bps offer good value in long-term schemes. So, we are overweight on that. In gilts, we do opportunistic trading and we believe that g-sec yields would be range-bound and would offer good trading portfolios. And base portfolio consist of money market securities," he said.

Over the next one month, Munot expects the 10-year government bond to trade in 7.75-7.95 per cent yield.