MUTUAL FUNDS

RBI can, should and will intervene. But they do not have unlimited ammunition. At the best case, may be USD 20 bln<
12-Dec-11   17:20 Hrs IST

Mr. Arvind Chari
The trigger has been an increase in hedging demand from portfolio investors and from importers and corporate with dollar liabilities. Add to that lower hedging demand from exporters waiting on the sidelines for rupee to depreciate. We at Capital Market interacted with Arvind Chari, Fund Manager - Debt, of Quantum Mutual Fund, to know the outlook on Rupee and Debt Funds in Calendar Year (CY) 2011.

Here are the excerpts: 

What's your call on Indian rupee? Don't you think if rupee continues to depreciate or even remain at current depreciated levels for long, India's growth story is as good as suspended?

Given that we are a country which runs a current account deficit, we need external capital inflows to fund the current account deficit. And the extent of capital flows in excess of current account deficit every year determines the movement of the rupee against the dollar. In the current year, we expect capital flows in total to be just about enough to meet the current account deficit. Adjusting for lead-lags, this should lead to some rupee depreciation. But we believe that the 15% depreciation seems a bit excessive.

It can be partly ascribed to the fact that the demand for rupee is sentiment driven where as the supply of rupee is contractual. Meaning, we have to pay for our imports on a contractual basis (rupee outflow), but the inflow of rupees is based on the investment sentiment prevailing in India, the global scenario and the relative position of the foreign investor/lender. Given the poor investment sentiment, both in India and globally, we have seen lower inflows into Indian equities thus weakening the rupee.

But we believe the trigger has been an increase in hedging demand from portfolio investors and from importers and corporate with dollar liabilities. Add to that lower hedging demand from exporters waiting on the sidelines for rupee to depreciate. And finally, on remarks by RBI on their stance of no intervention, giving speculators a field day in shorting the rupee.

It will actually depend on inflows and the extent or lack of it will determine the future trajectory. But at current levels, we believe that portfolio hedging demand would be lower. Importers would wait for better levels to initiate hedges. And at the other end, exporters would be more aggressive in converting dollar/rupee and also in initiating hedges.

We can also expect some inflows in the form of investments into Indian bond markets in the coming months the limits for which were opened up recently.

And we expect significant increase in remittances and NRI deposit flows with rupee and interest rates both being offered at attractive levels.

RBI can, should and will intervene. But they do not have unlimited ammunition. At the best case, may be USD 20 bln. But we believe that policy makers should always communicate their willingness to use any potential tool available to them and should not vocally rule out any option. Even a verbal message can sometimes be enough to ward of speculators.

We do not think that rupee depreciation on its own will bring an end to India growth story. There are reasons for rupee depreciation and the depreciation is almost always relative to something else. So yes on a sentiment basis, it is tough to see the rupee depreciate but the depreciation also bring in its advantages as exporters get much needed pricing power to fight against lower growth.  

After remaining at high levels for past couple of years, can inflation come down in CY 2012? Will RBI be able to cut interest rate in CY 2012 or the rate will remain stable? What's your view on investment in debt in CY 2012?

We believe that inflation would soften from the current high levels on the back of good monsoon, good kharif and rabi crops, slower growth leading to lesser demand and also due to statistical factors like base effect.

But there are some parts of food inflation which are structural in nature which will remain unaffected by interest rate hikes and might remain stubborn unless supply measures are in store.

RBI will definitely be easing in CY 2012, maybe in the second quarter (Apr-June) but could be earlier if growth falls of sharply and inflation eases more than expected.

Tactically, long term debt funds look a good investment bet and entry at current levels look attractive. But one also needs to exit at the appropriate time.

But liquid funds would continue to offer good returns on your short term cash surplus as repo rate would remain at 8.5% for some time and liquidity will remain tight.

Investors should also look to elongate their maturity profile of their fixed deposit and/or FMPs

Gilt Funds category has been facing net outflows since December 2010, what has been the reason behind it. Do you see any reversal in the trend in CY 2012?

As mentioned above, we see some tactical allocations being made to gilt funds which should lead to increase in gilt fund's AUM

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