By Mr.S. Ramasamy,
LIC Nomura Mutual Fund
As rates cool off,
investments made in debt instruments will appreciate & see gains..!
For some time now
market participants have held the view that the interest rate cycle has peaked
or / is nearing its peak, given our
inflation trajectory.
However, given the
current circumstances of India’s macro-economic factors, the Reserve Bank of
India may find it difficult to cut rates in the immediate future.
The stickiness of
inflation (especially CPI & food inflation) and the prospects of higher
government borrowings and deficit concerns as well as worries over global
commodity prices will continue to weigh on the domestic market.
Nonetheless, given
the need to kickstart our economy, the market is of the opinion that interest
rates need to soften and it is only the timing of the future cuts that is a
point of discussion.
 |
| Mr. S. Ramasamy, LIC Nomura Mutual Fund |
In the context of
India’s long-term economic growth estimates & long-term inflation
trajectory, our medium to long-term view has an undertone of bullishness and we
expect interest rates to soften in the next 2 quarters.
Why rates will cool
off?
The internal
situation is becoming healthier in the last one month. The concern over monsoon
has been removed by the latest guidance from the Indian Meteorological Department
(IMD).
International crude prices have come down
substantially, leading to a strong possibility of diesel price decontrol
following a sharp drop of under-recoveries.
The
balance-of-payment situation has improved following a reduction in trade deficit
and there is a likelihood that inflation will come down in future due to better
monsoon and higher base effect.
The only concerns are
the geopolitical problems in Iraq, Israel & Ukraine. These issues also may
not go out of control since the governments there are aware of the effects on
the global economy.
The other concern is
over interest rates going up in the US sooner than later. This has been
discounted largely and there may be a shorter-term reaction when it happens.
As rates cool off,
investments made in debt instruments will appreciate and see gains. The extent
of the gains will depend on a variety of factors, including the nature &
credit quality of the security and residual life of the instrument. It is
noteworthy that incremental investments made in times of lower interest rates
earn less in terms of yields and/or coupons, thereby affecting the future
profitability of the portfolio.
Given this economic
backdrop, it is a good time for investors with a medium- to long-term
investment horizon of, say, beyond six months to invest in debt instruments and
products, which can take advantage of the softening of interest rates.
As mentioned earlier,
our economy has slowed down. But given the bleak global conditions, we may
continue to outperform other developed and developing markets. We also hold
that the interest rate cycle has peaked or is near peak. Given our long-term
economic growth estimates and our long-term inflation trajectory, the medium to
long-term view has an undertone of bullishness.
In such market
conditions, investors having a medium- to long-term investment horizon can go
in for duration products, like dynamic bond funds, medium-term bond funds and
PSU bond funds. Investors may also look to lock money into higher interest
rates through FMPs and capital protection oriented funds (CPoFs). Debt-oriented
hybrid funds such as MIPs may also find favour in the coming year.
About the author..
The writer Mr.S.
Ramasamy is the
chief investment officer of LIC Nomura Mutual Fund.
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