 "Rahul Goswami, Chief investment officer (fixed income) at ICICI Prudential AMC")
Interest rates are headed lower due to moderation in consumption and probability of lower inflation, says Rahul Goswami, chief investment officer (fixed income) at ICICI Prudential AMC, the country’s largest fund house. In an interview with Ashley Coutinho, Goswami says accrual funds remain a suitable investment avenue for stable and better risk adjusted returns from here on. Edited excerpts:
What will be the medium-term impact of demonetisation on the debt market? What are the possible factors that could play out?
Fixed-income market has entered an interesting phase after a surprise downward move in yields, thanks to the improvement in banking liquidity post demonetisation. Also, an expectation of rate cut by the Reserve Bank of India (RBI) is another reason for the sharp fall in yields. When one looks at the larger picture, the government's radical move has changed the macro framework and is likely to turn economic indicators such as inflation, current account, fiscal and system liquidity in favour of bond markets. In the near term, inflation numbers are expected to trend lower after the demonetisation move on the backdrop of a relatively slower consumption and expectations of better food supply after a good monsoon.
Do you expect RBI to cut rates in the upcoming policy meet? How do you read the trajectory of interest rates for the rest of FY17?
We expect RBI to cut rates by 25-50 bps in the upcoming policy meet on December 7, 2016. Liquidity in the system is likely to remain surplus and RBI may need to resort to market stabilisation scheme to reduce this excess liquidity and RBI is likely to gradually reduce CRR (cash reserve ratio), which has been increased as a temporary measure to withdraw surplus liquidity from the system. Amid these developments, one has to keep an eye on the evolving global dynamics. Because of moderation in consumption and also high probability of lower inflation in the medium term, we expect RBI to ease rates by 50-75 bps over the next 2-4 quarters.
Do you see inflationary pressures easing in the coming months?
We expect inflation to remain low for the medium term partly because of the demonetisation effect coupled with continued moderation in food inflation. Owing to demonetisation, in the near term, there can be a possibility of slowdown in consumption and demand. However, the likely shift from unorganised to organised markets might offer counterbalance to the demand dynamics over a period of time. CPI (consumer price index) inflation is likely to moderate further owing to the kharif and rabi output. However, at the same time, we'll have to keep a watch on how energy and commodity prices behave and in medium term that will also have its fair share of impact on inflation.
The rupee has depreciated against the dollar since November 8. Do you see it weakening further?
After the US presidential election, the dollar has appreciated five per cent while the rupee has fallen 2.5 per cent. However, it wouldn't be prudent to see the rupee in isolation against the dollar. We have to see how the rupee has performed against a basket of currencies.
Which debt products will do well in the coming months? What is your advice to debt investors at this point in time?
We remain positive on the fixed-income market in the near term and recommend investors to stay invested in long duration funds.
However, we believe that the opportunity for new investors to invest in long-duration funds or incremental allocation has passed away and can now consider investing in short- or dynamic duration funds. Accrual funds remain a suitable investment avenue for stable and better risk adjusted returns from hereon. We maintain neutral to downward bias on long bond yields and money market rates are expected to remain low.
