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Can the next six to 18 months replicate the returns one has made in fixed income products over the past one year?
We have seen an approximate decline of 100 basis points in yields over a year. Over the next six to 18 months, we expect a measured decline of yields with the (expected) reduction in repo rates (at which the central bank lends to banks). The shift of benefits from producers to consumers, due to lower oil prices globally, will continue to support a benign imported (fuel) inflation for India, which depends heavily on imported crude.
Moderation in Minimum Support Price increases and a part amendment to the Agriculture Produce Market Committee law by keeping fruit and vegetables out of its ambit has effected a moderation in domestic (food) inflation. For these reasons, lower inflation is expected to continue for India in the forseeable future.
Which category of debt funds can really fetch investors the desired returns?
Long-duration gilt funds are best suited at this point. Investors are encouraged to select a duration of funds longer than their investment horizon. As the structural decline in inflation could take years to reverse, investors should ideally get into funds with a longer duration.
Where do you see the 10-year bond yield heading to, say, the next six to 12 months?
It will closely track the repo rate and move with it. The repo rate can decline progressively with the decline in Consumer Price Index (CPI) inflation. The Reserve Bank is also expected to move towards a one per cent real interest rate over the CPI and the 10-year benchmark is expected to closely snug the repo rate decline. Depending on the markets' expectations, the 10-year yield can also briefly drop below the repo rate if the rate reduction expectation draws closer.
Any bottom in the foresight for crude oil prices?
The decline will continue till Opec (the petroleum exporters' cartel) members can continue production without getting into a budget deficit. As shale oil technology moves towards a lower cost of production, the tilt in the dynamics of oil prices appear to be at a very early stage of a protracted tussle. As these changes in commodity cycles can take years to reverse, we expect the present lower prices to continue till Opec member-countries can sustain these levels without tipping into budget deficits. Their foreign exchange reserves, of billions of dollars, will support the oil exporting countries’ potency in this price war.
Do not you think such low prices of crude might not augur well for the global economy, including India, beyond a certain limit? Falling crude prices indirectly also means retarding of growth.
It’s good for getting back growth, as the benefits of a lower price get transferred to consumers, without being stashed away in sovereign wealth funds. It can tilt the investments of sovereign wealth funds and alter the course of investments into global markets. As the benefits of lower commodity prices get transferred to consumers, India, for example, can save around two per cent of its gross domestic product (GDP) over a year. It is a big positive for getting back an economic growth-led recovery.
What risk factors could dash the market’s hopes for imminent interest rate cuts?
A spiralling rupee as the dollar strengthens due to slowing growth in Europe and quantitative easing in Japan. The risk aversion of foreign investors in favour of stronger currencies such as the dollar can keep them away for some time. The second big risk is of execution by the Government of India. The lower inflation target of RBI rests upon the government improving the fiscal position and reaching its targeted fiscal deficit of three per cent of GDP by FY17.
Recently, the issue of a current account deficit (CAD) resurfaced. Could it be a major risk for RBI if not controlled?
The increase in the deficit is likely to narrow once the benefit of an oil price decline begins to get absorbed . While there might be some resurfacing of risks, the benefit from the pass-through of lower prices is expected to be large enough to override such issues from the CAD.
