Dhawal Dalal and Santosh Kamat share their views on the recent RBI policy action and their outlook on debt markets.
Dhawal Dalal, EVP, DSP BlackRock Investment Managers
We continue to expect one more repo rate cut by April 2013. Our base case is that the RBI will pause after that, for the rest of the year, unless there is a major correction in crude oil prices going forward.This should result in the benchmark 10 year government bond yield trending towards 7.70-75% per annum in the near-term.
With the fiscal deficit trend for this year and years ahead largely discounted, expectations from the Union Budget will likely remain muted. Keeping these factors in mind, investors should consider investing in income funds with high duration to benefit from the possible decline in interest rates in the next 3 months.
Systemic liquidity is likely to remain tight due to widening gap between credit growth (15% y/y) and deposit growth (11% y/y). This should keep the money market curve steep and may provide pockets of opportunities to invest in fixed maturity plans.
Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments
Global economic growth continues to remain subdued, particularly in developed economies. The high sovereign debt burden and limitations on the fiscal side have led central banks to adopt unorthodox policy measures to support growth. This was reflected in Bank of Japan’s recent measures-it joined the US Federal Reserve in adopting open-ended monetary easing (linked to Inflation target of 2%). Central banks in emerging markets have also maintained an easy monetary policy stance, while focusing on reining in export competitiveness.
Amidst this uncertain environment, RBI should maintain its growth supportive stance. However, a lot depends on the evolution of local and global risks. Inflation seems to be trending down due to fall in core drivers and weakness in global commodity prices. However, the government needs to usher in supply side reforms to ensure that the economy is not overtly dependent on the vagaries of global commodity markets. In addition, boosting of investment activity remains a key component for future growth.
RBI will continue to do a balancing act to manage growth and inflation expectations. Accordingly, the path to monetary easing is likely to be uneven. We expect market yields to fluctuate in a narrow range over the near term and the focus will now shift to the Union Budget. A portfolio of fixed income funds providing a combination of high coupon income along with capital gains will work well in the current environment.
