Jun 01, 2012 01:35 PM IST | Source: CNBC-TV18

Axis MF says further RBI easing may cap upside for yields

Rajiv Anand, CEO, Axis Mutual Fund says the market is worried about further slippages in the GDP.

Rajiv Anand, CEO, Axis Mutual Fund says the market is worried about further slippages in the GDP.

Indian economy witnessed an anemic growth of 5.3% during the final quarter of 2011-12, according to figures released by the Central Statistical Office. This is worse than the preceding quarter's 6.1% and positively disconcerting when compared to the spurt of 9.2% during the same quarter of the year ago.

According to Anand, the base effect is likely to push inflation to 8% in the next 2-3 months. The slow growth with high inflation is likely to worsen the situation. Immediate and firm steps to support growth are very much required.

With a lower-than-expected economic growth, the Street will look for some rate cut announcements from the Reserve Bank of India at its policy meet next month.

However, Anand points out that further RBI easing may restrict upside for yields. "Our portfolios are positions for a fall in yields from current levels," he told CNBC-TV18.

Also read: See more pain in market; June a tricky month, says Udayan

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: It was a disastrous GDP number. What kind of collateral damage do you think its going to have on the equity market and the money market over the course of this year now?

A: Expectations were anywhere in the vicinity of 6%. While the number itself is a disaster, the point that the market is contending with is, ‘at what stage, do we hit bottom?’ Is this the bottom or can we get a four print sometime in 2012-13? I think we also need to recognise the fact that this problem is not cyclical. It is structural. So, therefore, it is not going to get fixed on its own. We are hoping that this is a call to action to policymakers. Hopefully, things will start to move because on its own the momentum in the economy is not going to come back.

Q: Bond yields eased off to about 8.4% yesterday, after the GDP number. Is the market doing the right thing in betting on RBI policy move? Do you see the bond yield drifting lower from here?

A: We are now fairly clear that growth has fallen out of bed. I think the other issue is inflation. The base effect itself will push headline inflation up. So, therefore, to that extent over the next two-three months, the base effect will push it back up to 8%.

But having said that, given the fact that growth has fallen out of bed and the fact that global commodities have come off and come off quite sharply, I think it is just a question of time that the RBI cuts rates. Therefore, if the funding rate now moves from 8% to 7.5%, that gives a little more leeway for bond yields to rally. So, to that extent, not withstanding the fact that we will continue to see a fairly large supply into the market, we do believe that there is further downside to yields.

Q: You were talking about the possibilities of the yields drifting down. Do you see the bond yields drifting down anytime in the next few weeks to say those 8.2% kind of level? What kind of ramifications could it have on public sector banks which have been beaten down?

A: I think the view is that it’s difficult for yields to go up from here. So, in that context, I think our portfolios are positioned for yields to drift lower. Whether that happens in next week or next month? That’s not too much of a concern, as far as we are concerned.

As far as public sector banks are concerned, it’s positive that bond yields will come off, mark to market losses or mark to market gains will start to kick in. But on the other side, one needs to also see the possibility of a further deterioration in the asset quality, given the fact that we are seeing a sharp slowdown. Given the fact that investment demand has slowed and slowed considerably, that would have implications on the infrastructure. So, therefore, one needs to weigh off any gains that one would make some treasury from the possibility of deterioration in non-performing loans (NPLs).

Q: How do you approach the autos, given the point you were making about rate sensitive?

A: I think two things are happening within that sector. Given the misalignment of petrol and diesel prices, we are seeing diesel vehicles proliferate. Demand still continues to be reasonably strong. Auto loans seem to be going off the shelves reasonably fast. So, I do not see too much of a problem there. In the context of the fact that global commodities are coming off, that should be positive for autos as well.

Q: Would you expect more aggressive action on rupee? It hasn’t been forthcoming in the last ten days or so. Would you expect the Reserve Bank of India to start attacking the rupee’s weakness now?

A: Not really. Some part of the weakness in the rupee is domestic problems, but also remember that the dollar index has take off. So, unless we see some cooling off on the dollar index, any action from the RBI will be to control the volatility rather than the direction of the rupee.

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