Kumaresh Ramakrishnan, head, fixed income, DWS Investments, spoke to Puneet Wadhwa on India’s financial markets. Edited excerpts:
What are the key concerns investors have relating to the Indian fixed-income market?
Interest rates have been on the rise in the last 12 months on the back of strong credit growth and slower deposit growth. During this period the inflation has also been on the rise. The Reserve Bank of India (RBI) has responded to rising inflation through a series of rate increases, that, in turn, has exerted further pressure on the liquidity.
Rising yields have led to some volatility in returns, particularly in the medium and long term income funds. This has led to some risk aversion amongst investors.
In this rising rate environment, investors have largely chosen to invest in liquid and ultra short-term debt funds, in addition to close-ended funds.
Do you feel these consecutive rate increases by the RBI will be able to tame inflation?
Macroeconomic data has started turning softer in the last few months as the impact of the rate rises works through the system. Key economic indicators such as the gross domestic product and the index of industrial production numbers have started reflecting this trend.
Although the advance tax outgo in June remained robust, credit growth in the fiscal now has started showing some deceleration. Also, some of the leading PSU banks have started indicating lower guidance for the credit growth in the fiscal 2012.
In its latest mid-quarter monetary policy review, the RBI has indicated that the monetary policy transmission has been strong. Given this background, it appears the rate rises and the tight monetary policy stance adopted by the RBI are having the intended effect.
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What is your biggest near-term macroeconomic concern on the domestic and global front?
In the last few months, the inflation has been the biggest concern for investors and policymakers alike. Most part of the WPI inflation was driven by external factors - specifically oil and other commodities.
However, in the last few months, we have seen that the inflation has tended to get generalised. The full impact of the recent fuel price rises, especially in diesel, kerosene and LPG, will start to reflect in the headline numbers in the coming months. The second round of the impact of the price-rise of the transportation fuels will also lead to a higher inflation in manufactured products.
On the positive side, commodity prices, especially oil, have started softening in the recent weeks. Food inflation, though still in high single digits, is now moving in a narrow-band. As regards the global factors, the US has indicated there will be no further quantitative easing. This is positive for commodities, that have been rising in the last 24 months. So, while inflation has been the primary macroeconomic concern over the last few months, the combined effect of monetary policy actions and declining global commodity prices is a positive for inflation, going forward.
How do you expect the 10-year G-sec yields to pan out in the near-to-medium term?
The benchmark 10-year G-sec after peaking at 8.45 per cent is now trading in a band between 8.20 -8.35 per cent. After the fuel price increase, the 10-year bond yields have remained largely stable.
While fuel price increase will lead to higher inflation in the coming days, we believe a higher WPI is priced into the current G-sec yields. Further, with oil and global commodity prices moderating in the last few days, we think the G-sec yields should remain well-supported. Continued supply from auctions through the year, is however expected to keep a rally in check.
What is the growth you are expecting in assets of debt funds in FY12? What will be the key challenges?
Growth in fixed-income funds tends to be a function of both market liquidity and risk appetite of the investors. In the backdrop of volatile and rising rates, investors in these funds have shown a marked preference for low-risk and relatively stable return products such as money-market funds and fixed-term plans.
For the current fiscal, as the rates stabilize on the back of an expected moderation in inflation, we expect some fund flows to start returning to medium-term debt category products. We expect this category to re-emerge as meaningful, in addition to the existing choices of short-term funds and FMPs.
