Inflation sticky; difficult to invest in fixed income: HSBC

Steven Major, global head of fixed income research, HSBC expects inflation to remain sticky ahead. Investors are aware that India is facing two major challenges of soaring inflation and subdued growth , he added.

He sees pressure on inflation going ahead, which will makes difficult for investors to buy fixed income securities like government bonds.

"It is challenge for investors to buy Indian government bonds because they are going to be exposed to the inflation risk, but there will be sectors that actually do very well. So it’s more about rotation," he elaborated.

Below is the edited transcript of Major’s interview with CNBC-TV18.

Q: Your word on the FOMC rally, the key announcements that have come through. What impact that would have on commodities per se and thereby the inflation for the world?

A: The Fed’s announcement is another one of these whatever it takes. It’s another round of unlimited intervention. If we take the experience of 2008-2009 then the obvious conclusion that most people are jumping to is that it means the commodity prices go up and we get some inflationary pressure.

We should be a bit careful with that simplistic comparison because some of the developing economies may not be growing as fast as they were in 2008. In fact they may have been facing their own constraints and indeed India could be one of those.

Maybe it’s not so obvious that this money leaks out and goes to the same places as before. It maybe inflationary, but perhaps in the US it could be inflationary. There is going to be some spillage and there is going to be some commodity price effect and the pressure is going to be upwards on inflation.

Q: The first round of quantitative easing somebody calculated led to a 50% rise in crude oil prices, the second round led to a 30% rise in crude oil prices. Now a lot of economy watchers are targeting USD 120 a barrel on Brent that has at least in the past three years led to a slowdown. You don’t see that scenario now?

A: It’s fair to say that the trend you have just pointed out is quite good, because it’s a bit like a sign wave, more like a funnel, so each impact becomes less than the one before.

You need to spend much more money to even get the same effect. In simple terms, the market knows it is coming and so has already priced some of it in. I think there will be less impact than on the previous two rounds QE1 and QE2.

Q: India inflation numbers has been disappointing. Overnight we got a fuel price hike as well which would further escalate inflation as well going forward. How are people viewing India as an investment destination keeping in mind inflation is at such high levels?

A: People know that there is a growth and inflation challenge. Growth is at the bottom end of the range really and inflation could be going to the top end of the range. This isn’t ideal at all. If there is going to be an international factor that puts upward pressure on inflation then it makes it even harder for the RBI to manage things.

It means that from an international perspective, when you look at investing in developing markets it’s going to be different to 2008. It’s not clear to me that same kind of investment flows are going to happen.

Maybe people will look at different sectors. Perhaps it’s a challenge for investors to buy Indian government bonds because they are going to be exposed to the inflation risk, but there will be sectors that actually do very well. So it’s more about rotation.

Q: The last round of Indian government bond auction, the auction limits was not well taken. That was perhaps because at that time the rupee had just seen a blistering attack and ha depreciated by about 10-15%. How are you looking at any possible investment opportunities in the fixed income side?

A: The positive for the Indian market is that it’s a true sovereign as I have called these countries. Countries that have their own currency, their own fiscal policy have a big advantage over bunch of countries in Europe without this. So that’s a positive.

Investors are looking for diversification opportunities. The problem is the inflation is sticky and that makes investing in fixed income securities difficult, especially in the government type. So I think it’s going to be a big challenging in the next few months.