By Subhadip Sircar
The Reserve Bank of India (RBI) will have scope to cut benchmark interest rates once again as growth in Asia’s third-largest economy slows and consumer-price gains stay within the central bank’s target range, according to Kotak Mahindra Asset Management Co.
“You have a confluence of favorable CPI, lower GDP growth and a necessity to keep rates stable with easing bias,” said Lakshmi Iyer, the Mumbai-based chief investment officer for debt at the money manager. “The scope for one rate cut by March 2018 is definitely there.”
Calls for further monetary easing have resurfaced after data on Aug. 31 showed that economic growth in the April-June quarter was the slowest since 2014. The RBI last cut the key repurchase rate to 6 per cent on Aug. 2 and signaled that its future moves will depend on how the inflation data pans out. That saw the benchmark sovereign bonds post their first monthly decline since April.
Consumer prices probably rose 3.24 per cent in August from a year earlier, according to the median estimate in a Bloomberg survey of economists before an official report due later Tuesday. That’d be faster than July’s 2.36 per cent pace, but within the RBI’s projected range of 2 per cent to 3.5 per cent for the April-September period.
“Neither from the demand side, nor the supply side could one be led to believe that inflation can skyrocket from current levels,” said Iyer of Kotak Mahindra Asset, which oversaw 1.01 trillion rupees ($15.8 billion) at the end of June. The money manager’s bond funds are primarily invested in the seven-to-12-year segment of the sovereign yield curve, she said.
India’s benchmark 10-year yield was little changed at 6.57 per cent in Mumbai on Tuesday, having risen 13 basis points from Aug. 1.
Iyer’s other key views:
Bond Strategy
-Says 7-12 year bucket of the bond yield curve is a “reasonably sweet spot”
-Says given the rise in the 10-year bond yield and the fact that interbank rates are still below the repo rate, the carry is ‘lucrative’; “You have a carry yield in excess to 60-70 basis points for a sovereign,” she says
-“You get the participation, ride the curve and you ensure if there were to be a runaway rally, you are not left out,” she says. “It is measured optimism rather than outrageous bullishness”
-Says don’t see any reason to go “ultra long” at this point in time: “we are running fully invested portfolios and that’s taking care of our duration aspiration close to benchmark”
-Says reasonable confidence that 10-year yield will be 15bps-25bps lower from current levels by March
-Doesn’t have state bonds in portfolio, though says current spreads ‘attractive’
Inflation
-No reason to believe that there will be any meaningful deviation from RBI’s 4% target by March
Rates
-A repo rate of 5.75% — which means 25bps cut from current levels — is acceptable as it leaves a real rate of 150-175bps, taking inflation at 4% or thereabout
-Bond markets are not pricing in a 25bps cut right now. If that was the case, yields wouldn’t be where they are right now
Source: Bloomberg