Not appropriate time to buy in bond mkts: StanChart AMC

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS RBI invites comments on Working Group Report Global markets – Are they worth investing? Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Naval Bir Kumar, MD, Standard Chartered Asset Management said that the markets are worried about price action from the RBI.

 

He added that inflation seems to be controlled and it does not expect interest rate action from the RBI.

 

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

 

Q: What would you make of the interest rate scenario? Do you think the worst is over and would you be a bond buyer at current levels?

 

A: Your assessment is fairly right. The markets are worried about price action from the Reserve Bank of India. Inflation seems to be controlled and hence, we do not expect interest rate action from the RBI.

 

The markets are now reacting to the liquidity situation and we have seen liquidity changed dramatically over the last six months. The shorter end of the curve, where there is a fair degree of action, reacts to liquidity. The longer end of the curve seems to react more with interest rate direction from the external markets.

 

We do not believe that at this point it is appropriate to buy into the bond markets because going into September, liquidity does tend to tighten. So, we would rather stay liquid at this stage.

 

Q: Do you think that as circumstances are panning out now, the Reserve Bank might water down its hawkish stance on inflation? Will the stance on July 31 get watered down in October, considering that inflation is well under control, and considering that globally things have changed a goodish bit on the interest rate front?

 

A: I am not so sure because a lot of the reduction in inflation was caused because of the appreciation of rupee. Since the direction of the exchange rate has reversed marginally, I would believe that the Reserve Bank would wait a little longer to see its impact on inflation. I am not expecting a sentiment change from Reserve Bank of India yet. 

 

Q: Are you expecting that in the next six months, the Reserve Bank might actually cut the SLR percentage, as it has been empowered to do?

 

A: You are going into a busy season policy and it will depend on how robust credit demand in the economy is. RBI has always stated that their objective is to maintain sufficient liquidity to ensure growth is not impaired. Our belief is that if credit does pick up and RBI is not worried about credit deposit ratio, like it was last year, then you could see them providing that excess liquidity in the markets through SLR cut.

 

Q: Do you think the equity markets will start to take into account what has been happening politically, as well as what is happening globally? Do you think the markets are poised at all to repeat the highs that they touched earlier in the year?

 

A: I would not give another 30-60 days to determine the direction for the remainder of the year, because it is a fairly uncertain period in global markets.

 

The markets are a little rattled that there were redemptions by foreign institutional investors, on a day when the market closed more than 250 points up. Plus, the credit issues have now spilled over to liquidity issues in global markets.

 

I would rather see this played out over the next 30-60 days before I venture a comment on whether our markets will playback. What is under attack in our markets today is the PE ratio. If flows into the Indian equity market continue to be sluggish, you could see a PE re-rating.

 

Q: Do you think that despite the fact that the FII inflows have turned into outflows in some weeks; in the months to come, domestic liquidity or domestic inflows into the mutual fund industry will kind of countervail the possible outflows from FIIs?

 

A: We hope so. Clearly, we are seeing maturity from the domestic investor group. In the initial years, we saw that they reacted to flows from domestic investors. An increase in markets would be buoyant and decline in markets would be bearish.

 

We have seen a little delinking now. We have been in the last four-year period where the markets have been very buoyant and hence, flows have been strong. So, if there is no strong reversal in the direction of our equity markets, then I would assume that the domestic flows would continue. We have seen maturity in domestic investors and they are willing to ride out short-term volatilities in markets. They won't panic as easily.

 

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