Don't see RBI pushing up policy rates soon: IDFC MF

Naval Bir Kumar of IDFC Mutual Fund said inflation is the biggest worry from a monetary prospective and the market does expect the RBI to continously act on inflation.

He said bond yields will inch up a little bit more if the inflationary data continues to be bearish. He doesn't believe RBI is likely to push policy rates up at least for the next month or month-and-a-half.

Excerpts from CNBC-TV18's exclusive interview with Naval Bir Kumar:

Q: What are you looking at by way of the 10-year at this point in time? There seems to be only clouds and dark clouds on the horizon in terms of inflation, in terms of extra government spending, probably nasty fiscal numbers and expanded market borrowing by the government.

A: Clearly, inflation is the biggest worry right now from a monetary prospective and the market does expect the RBI to continously act on inflation. One should see yields inch up a little bit more if the inflationary data that comes out every Friday continues to be bearish and all indications are that it will continue to look bearish for some period of time. One will have this tightrope in terms of liquidity in markets over the next two months. The RBI will not be able to allow large amounts of liquidity and it is very hard to manage that delicately. We do expect bonds to continue to give for some period of time.

Q: In your radar, are you expecting at all that the RBI will push up policy rates because of the way the fisc may shape up or inflation may shape up?

A: I don’t think so, because even earlier on, we believed that they will play the liquidity angle much more strongly rather than the policy rate angle. That view still remains firm that we don’t believe RBI is likely to push policy rates up at least for the next month or month-and-a-half. 

Q: As a fund manager, how would you approach the equity markets? Do you think that the March lows are quite likely to be challenged? Would you rather go into cash? In fact, what's the cash position?

A: Each individual fund will have its own strategy. As a fund house, we have looked at cash a little bit more aggressively for the last four to five months than we normally have over the last two to three years. We do expect a little bit of a slowdown in equity market returns over the next few months and this is an indication right across global markets, not only in India. I do believe that earnings will come off a little bit in 2008-09 over the pervious year and plus given the high inflation, it will have an impact on equity markets because relatively India is still a little bit more expensive than the rest of the emerging markets and hence does not have the comfort in terms of valuations.

So it is to that extent a little vulnerable over the next few months.

Q: What is your normal cash position and what do you mean by ‘aggressive cash position’ that you currently have and sectorally, where are you’ll taking shelter?

A: You are looking at earnings exceedingly closely. You want to look at sectors, which are not overly expensive. You don’t want to play the old momentum sectors aggressively and the focus on hence being able to beat the market in terms of the markets expectations of earnings and our analysis is becoming very critical at this stage. When I talk about cash, like I said, different funds have different strategies, but it would be a few percentage points more. It would not be a dramatic move into cash. 

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