RBI to watch inflation before undertaking rate action: Tata MF’s Murthy Nagarajan

Global factors like rising US rates, along with stable domestic consumer price index may prevent the RBI from taking any rate action, despite criticisim from Chief Economic Advisor Arvind Subramanian, said Murthy Nagarajan, Head, Fixed Income, Tata Mutual Fund in an interview to Moneycontrol.

“Even though Arvind Subramanian has spoken on the need for RBI to look at easing rates, we think it is some time off. RBI would like to see how CPI inflation pans out over a longer period of time and whether 4 percent inflation is achieved on a durable basis before they look at cutting rates,” Nagarajan said.

“We may see a longish pause on rates going forward and subsequently if inflation comes to 4 percent after one or two years we may see RBI cutting rates,” Nagarajan added.

Recently, Arvind Subramanian had questioned the decision of the RBI and the Monetary Policy Committee (MPC) of not cutting rates when all indicators, including core inflation, were in a steady state of decline and well within the central bank’s comfort zone.

In its last four policy meetings, the monetary policy committee cut rates by 25 basis points, held rates, changed the stance on liquidity from 'accommodative' to 'neutral', and increased the reverse repo rate by 25 bps, in that order.

Retail inflation fell sharply to 2.99 percent in April, from 3.89 percent in March, due to lower cost of food items, including pulses and vegetables that showed a deflationary trend.

The CPI inflation hovered around the RBI, medium-term target for retail inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

On the question of rate reversal from RBI, Nagarajan said, “We are not seeing any pressure as far as CPI inflation is concerned. Credit growth continues to remain around 5 percent kind of levels.”

“Given this type of situation we do not see RBI looking to hike rates now because there is not a one single indicator whether you take capacity ultilisation rate, CPI inflation, credit growth. None of the factors show that RBI should be looking at hiking rates,” he said.

He expects crude oil prices to trade in the band of USD 45-55 per barrel in the short-term.

“The moment oil prices go below USD 50 per barrel we are seeing that lot of supply is coming from US Shale Gas. There is also some amount of supply which is coming from other countries who are increasing and ramping up production. So, oil prices are expected to trade in band of USD 45-55 a barrel which is expected to be positive,” Nagarajan said.

On New York Mercantile Exchange, the crude oil closed at USD 49.86 a barrel on May 26.

On ample liquidity in the banking system, Nagarajan said, “This liquidity which is there will continue to remain. We expect in this current fiscal at least ample liquidity will continue and may be after some point of time liquidity go to neutral."

Speaking about foreign investor interest in bonds, Nagarajan said the high yields over the past couple of months have continuously attracted FIIs, mainly because at the current level India offers one of the highest real interest rates in the world.

“FIIs are entering the market when (10-year bond) yields are closer to 7 percent whereas in their (US) market 10-year is closer to 2 percent above levels. So, there is clear difference of 5 percent which they are able to get. So even if they take a currency depreciation of 1 or 2 percent FIIs will make a return of around 4-5 percent just by coupon accrual. So 5 percent return is very attractive for them,” Nagarajan said.

Tata Mutual Fund expects the 10-year government bond to trade in the range of 6.65-6.80 percent over the short term and 6.65-6.90 percent levels over a longer period of time.

As collateralized borrowing and lending obligation or CBLO rates are closer to repo rates, Nagarajan expects the three-month certificates of deposit to trade in a narrow band of 6.30-6.40 percent levels while three-month commercial papers will trade in the band of 6.50-6.65 percent.

Tata Mutual Fund is playing safe by running maturity of 5 to 6 years in all their duration products as they expect market to remain range bound.

“If yields go up from these levels we will increase the maturity and if they come below a particular level then we may cut down our maturity. It will be a market where coupon returns will dominate rather than capital appreciation return. Given that situation we like to play it safe and not take coupon but try to make some amount of profits,” explains Nagarajan.

Nagarajan recommends investors to look at short-term bond funds for investments at this point and time.

“Short term bond funds will give you short term accruals. The 2-3 year (bond) rates are around 7.25-7.34 percent of AAA rated papers so given that accruals will be decent there and expectations that there won’t be any rate hikes in the next one year at least and after that subsequently if there is any rate cut expectations then this fund could perform better,” he said.