With inflation remaining benign and expectation of good monsoon, the Reserve of India may look to cut rates by 25 basis points as early as August, according to Lakshmi Iyer, Chief Investment Officer-Debt and Head-Products at Kotak Mutual Fund.
“We are here for very aggressive tightening and that is what bond markets are suggesting and given that we wouldn’t be completely surprised if we actually expect a 25 bps rate cut probably as early as August,” Iyer said in a freewheeling chat with Moneycontrol. Until August, however, evolving data is needs to be monitored closely, she added.
On June 7, the central bank kept its key interest rate unchanged at 6.25 percent and lowered projections for inflation. Consumer inflation cooled to record low of 2.18 percent in May, dipping from 2.99 per cent in April, led by a fall in food prices. This has boosted expectations the RBI could cut rate interest rate at its next policy meet in August.
The 10-year government bond may continue to remain in the tight band of 6.45-6.65 percent, but if there were to be a rate cut of 25 bps and RBI’s stance continues to remain open-ended then 10-year range may shift lower, Iyer said.
At the same time, she does not rule out the possibility of 10-year going towards 6.25 percent mark and trade between 6.15-6.30 percent region with evolving prospects. "Inflation is coming down and it is continuing to becoming mellowed down. So there is no reason for such a steep yield curve,” said Iyer.
On Wednesday, the 10-year bond was trading at 10.46 percent.
On liquidity scenario, Iyer said the liquidity will remain comfortable but she added that since the Liquidity Coverage Ratio has been introduced, mutual funds are prepared for outflows on monthly basis from liquid fund and ultra-short term funds.
LCR is a regulatory requirement for banks to set aside a certain amount of highly-liquid assets, such as cash or Treasury bonds, to meet short-term liquidity disruptions. Hence, banks have that much less availability of short-term funds.
Speaking about the rates on short term money market instruments, Iyer said, the rates on commercial papers and certificates of deposit may continue to remain stable due to comfortable liquidity in the banking system.
Iyer advised investors to look at corporate bond based accrual fund strategies and short duration funds for investments as these funds will be beneficiaries of the fall in interest rates.
For the ones who have already invested in long term bond funds, Iyer suggested that they should stay put and not book profits. “At this juncture, a few investors who have exposure to long end we are recommending they should not profit book out of that because if you see past returns they look fairly attractive. So, there is this tendency or temptation to book profits.”
Iyer who also manages gold fund at Kotak Mutual Fund did not seem to be very bullish on the yellow metal. She recommends investors to look at gold as a safe-haven asset and not don’t treat it like an investment and buy gold in bulk.However, she feels that once festive season kicks in gold might see a slight upside in prices.
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