MUTUAL FUNDS

Emerging credit deposit equation will play very vital role in deciding direction of interest rates<
16-Apr-13   14:26 Hrs IST

Mr. Yadnesh Chavan

In the near term the issuance of new ten year government security and possibility of open market operations from RBI to absorb off-the-run securities will keep check on the long term yields, says Yadnesh Chavan, Fund Manager, Fixed Income at Mirae Asset Global Investments (I) Pvt. Ltd.

We at Capital Market interacted with Yadnesh Chavan to now the outlook on debt markets.

Excerpts:

  1. Reserve Bank of India (RBI) has cut the repo rate by 25 bps. What are your views? Do you expect further rate cut by RBI?
  2. March WPI inflation at 5.96% YoY was the lowest recorded inflation since November 2009. Soft economic outlook as validated by weakness in lead indicators of PMI, IIP growth, credit growth and  fiscal consolidation in FY13 and FY14, and a sharper than anticipated decline in WPI Inflation is hinting that RBI to have softer rate bias going forward. RBI has already cut the rates by 50 bps in the first quarter however not much of transmission is visible in the banker`s lending rates and hence we feel that RBI will keep a small pause before it does further rate cuts.

  3. Kindly share your views on the rising current account deficit and its impact on RBI's further rate cut as RBI has expressed concerns over high CAD and said that a high CAD will threaten macroeconomic stability and impact growth.
  4. We are already witnessing the crude has come down to $ 100 per barrel and gold prices had come down to $ 1400 levels. Both oil and gold prices, the two main drivers of the CAD have moderated, but we suspect that the RBI would first like to ensure that falling gold prices do not result in more aggressive purchases, i.e., the volume effect does not start to dominate the price effect. We, therefore, believe that the RBI is unlikely to cut at the May 3, 2013 review.

  5. What is your opinion on the currency movement? How has it affected the bond market and liquidity in the system?
  6. Going forward the currency will not show the huge movement which we saw in near past. It is expected that the currency will in the broad range in line with current levels. Government of India has rationalized norms for foreign institutional investors (FIIs) to invest in domestic debt. The government removed the sub-limits within the US$25 bn limit for FII investment in government securities, and US$51 bn limit for corporate debt; it also introduced an on-tap system for allocating debt limits to FIIs, replacing the existing auction mechanism. Looking at the higher yields in the Indian bonds we can expect as currency will stabilize a lot of foreign investors will invest in India which will create good demand for Indian bonds and improve the liquidity substantially.

  7. Where do you see the benchmark 10-year G-Sec yield in the next three months?
  8. On the fixed income markets prospective we feel that emerging credit deposit equation will play very vital role in deciding direction of interest rates. On the longer term segment we feel that the pickup in the economic activity will give more comfort to the markets, as it will improve the fiscal situation and will also force banks to raise more deposits to fund the credit off take, which in turn will create additional demand for the government securities. In the near term the issuance of new ten year government security and possibility of open market operations from RBI to absorb off-the-run securities will keep check on the long term yields. Whereas towards the shorter end of the curve we have already seen that the yields have already moderated by 50-60 bps from March end levels. Also direction of short term CD yields can remain southwards because of lack of more supply in beginning of the new financial year.

  9. What is your outlook for corporate bonds in FY14? Will corporate bonds move in tandem with G-sec yields?
  10. Looking at the size of government borrowings there are huge chances that the debt will be crowded with the issuances. If there is pickup in the credit off take because of improved growth being this election year we are also expecting a lot of capital sending in such a scenario the spread between the government securities and corporate bonds can get widen looking at the demand-supply mismatch. Also it is expected that OMOs will support the government yields however corporate bond yields will not have any such a support.

  11. Can you tell us about the short term instrument movement in the near term?
  12. As we believe emerging credit deposit equation will play very vital role in deciding direction of interest rates. In case of the pickup in the credit offtake the banks will be forced to issue a lot of CDs. In current liquidity situation banker`s chase of deposits will drive the short term rates higher. 

  13. In the Union Budget 2013-14, Finance Minister has increased the dividend distribution tax (DDT) on debt funds.  How will the hike in dividend distribution tax on debt fund investments to 25% from the existing 12.5% impact returns and inflows into debt schemes?
  14. We expect flows to Debt Funds will be negatively impacted by the increase dividend distribution tax (DDT) on debt funds to 25% from 12.5% (this is effective from 1st June 2013).  This will reduce the tax arbitrage between debt funds and fixed deposits.

  15. At the current juncture, which category of debt fund would you recommend to the retail investors?
  16. As we are not expecting that the overall interest rate in economy to fall in line with the RBI rate cuts and looking at the supply side we do not expect a huge fall in the Gsec yields. In this light looking at the invested yield curve and risk return parameters it makes sense to be invested in the short term bond funds with portfolio duration rage of 1 to 1.5 years.

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