We believe that the vegetable prices may begin to normalise once the Rabi season supply begins to enter the market. Moreover, the HRA impact too may be transitory in nature.
Kotak Mutual Fund
The Reserve Bank of India (RBI) left the key policy rates unchanged in its December 5-6 meeting. This was in line with our expectations; and negates the view that rate hikes were on the anvil.
It is manifest that the ‘bonus’ from low crude oil prices may be tapering out. The sharp rise in the Brent prices; coupled with seasonal variation in the vegetable supply, has caused the CPI to begin trending upwards from June-17 onwards.
The larger market belief was that this upward buoyancy may cause the RBI to harden the stance. For that reason, almost 22 percent of the respondents (as per one survey) believed that the rate hike was imminent.
However, RBI has stated that it expects the CPI to be in the 4.3-4.7% range by March-18. This is an upward revision of only 10 bps from the earlier RBI projection.
The central banker is of the opinion that the inflationary pressure from the crude; and from the HRA increase; is balanced off by the deflationary pressure from GST driven efficiencies. Thus the central banker has taken a more poised view of the evolving situation.
The monetary policy would now increasingly be data dependent. We believe that the vegetable prices may begin to normalise once the Rabi season supply begins to enter the market. Moreover, the HRA impact too may be transitory in nature.
On the other hand, the GST driven efficiencies are structural in nature and are enduring. The fiscal expectations from the Union Budget too would now begin to find a place in the RBI’s policy calculus.
Thus, in our opinion, the rates are not getting touched in hurry, either for a hike or for a slash.
In this backdrop, we believe that the yield curve is likely to remain steep. While the near-end curve may remain stable, the longer end of the curve may be volatile from time to time due to event led and supply-demand related factors.
Fixed income investors may, therefore, want to look at corporate bond dominated accrual funds. Investors unwilling to assume credit or duration risk can also invest in high-quality short-term bond funds.
Investors with shorter time frame could look at investing in ultra-short term debt funds to have a stable bias on their fixed income portfolioDisclaimer: The author is CIO (Debt) & Head – Products, Kotak Mutual Fund. The views and investment tips expressed by investment expert on Moneycontrol.com are her own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.