Currency ban will result in deflation, says DHFL Pramerica MF

According to Ramakrishnan, in the near term this move will lead to a further drop in CPI and WPI numbers giving an impetus to the central bank to lower policy rates.

Retail or CPI inflation dipped to a 14 month low of 4.20 percent in October, while the one based on wholesale prices or WPI fell for the second consecutive month to 3.39 percent in October.

He expects RBI to cut rates by 25 basis point in the December policy. However, he said there is a possibility of more than 25 basis point rate cut but RBI may restrict it to 25 basis points as the US Fed is expected to hike rates next month.

“There is a little bit of volatility in international markets. Post the outcome of US elections, US treasury yields have moved up quite sharply. There is a very high probability that Fed will hike rates. So that is the only factor that will stop RBI from a 50 basis point rate cut otherwise 25 bps looks pretty much on the cards,” said Ramakrishnan who is currently reading a book by Charlie Munger named Poor Charlie's Almanack.

For the rest of this financial year, he expects the RBI to cut benchmark rates by 50 basis points more. Over the next 9 to 12 months, he expects another 75-100 basis points cut.

He says 10-year government securities may trade below 6 percent levels if RBI cuts a total of 100 basis points.

Post demonetization announcement, 10-year government bond yields had come down to 6.30 percent from 6.75-6.80 percent levels traded earlier.

In terms of rates on short-term money market instruments that are certificates of deposits and commercial papers, Ramakrishnan says rates have already started falling as the shorter end of the curve gets impacted by ample liquidity. Currently, short term CP, CDs are trading below 6 percent which is closer to CBLO rates.

As banks are flushed with liquidity, the need to raise funds via CDs is limited. This would further lead to a dearth of short-term papers in the near term, Ramakrishnan said. Away from work, Ramakrishnan is an avid traveler and a lover of soccer and cricket.

“Supply [of money market papers] is limited at this point and there is no big amount of supply as banks are not issuing, and the supply from corporates is not as much. This slowdown in supply will also impact yields both in this and the next quarter,” he said.

He further added that shortage in supply of CDs, CPs may further pull down rates on short-term papers as there is ample liquidity on one side but there is no supply of paper on the other side.

The fund house has been receiving ‘decent’ inflows in its debt and duration funds. In fact, banks, too, have started deploying their surplus cash in these funds.As on quarter ended September 30, the average assets under management of the fund house stood at 24,473 crore.

As interest rates are expected to trend lower, Ramakrishnan recommends investors they deploy in duration funds.

Debt funds gain when interest rates rise by way of interest accruals. They also gain when interest rates fall by way of capital appreciation.

That is because when interest rates fall, the value of older bonds—offering higher interest rates—in the portfolio increases in value.  On investments in Tata Group’s debt papers, Ramakrishnan said, “In terms of credit view there is no change. We have not changed the allocation. We continue to remain comfortable from the credit point of view.”