Expect 25 basis points Repo Rate Cut: Rahul Goswami
Mon, Jun 01, 2015
Source : Jeni Shukla, Citrus Interactive

Rahul Goswami is the Chief Investment Officer - Fixed Income at ICICI Prudential Asset Management Company. He has an experience of over 17 years.

Rahul currently manages ICICI Prudential Liquid Plan, ICICI Prudential Flexible Income Plan, ICICI Prudential Floating Rate Fund, ICICI Prudential Banking& PSU Debt Fund, . ICICI Prudential Medium Term Plan, ICICI Prudential Gilt Fund(All Options). ICICI Prudential Multiple Yield Fund, ICICI Prudential Capital Protection Oriented Fund

In an exclusive interaction with Jeni Shukla from Citrus Interactive he talks about his expectations from the RBI Policy, views on the market and his funds.

What is your expectation from the RBI Monetary Policy review on 2nd June?

Looking at the current macro-economic fundamentals, we believe that interest rates are at much elevated level at this point of time. With inflation likely to average in the range of 4.5-5% over next six-eight quarters, Government fiscal continuing to consolidate, low credit demand and currency remaining stable, there is a likelihood that RBI continues to moderate the monetary policy stance. There is high probability of a 25 basis point cut in repo rate on in the upcoming monetary policy meeting.

What is your view on the interest rates in the next 1 year? How do you think the repo rate cut will impact the benchmark G-sec yield?

We need to see what the inflation data looks like post the June RBI Policy given slight uncertainty on monsoon front. Overall we expect a 50 to 75 basis point repo rate cut in the current financial year. The relationship between repo rate cuts and impact on G-sec yields is not linear. At the same time last year when the repo was 8%, G-sec yields were at 8.75%. Even in January' 2015 before the first RBI rate cut, the repo rate was 8% and yield was down to 7.9%. We saw government bond yields remaining around 7.80% even after the RBI cutting repo rate twice (totaling 50 basis points) to 7.50%.

From end of March to end of May we have seen that liquidity has remained tight as currency in circulation has gone up and Government cash balances have remained high. We believe that liquidity conditions could improve. The combined effect of rate cut, liquidity conditions and future RBI rate expectations determine the G-sec yield. We believe that a 25 basis point cut in repo rate with improvement in liquidity conditions can most likely lead to a 15-20 basis point fall in G-sec yield.

What differentiates ICICI Pru Constant Maturity Gilt Fund, ICICI Pru Gilt – Treasury, ICICI Pru Long Term and ICICI Pru Short Term Gilt?

ICICI Pru Constant Maturity Gilt Fund has a mandate of maintaining a constant portfolio maturity of close to 10 years at all times whereas ICICI Pru Long Term Gilt Fund could allocate to bonds with maturities as low as 3-4 years and as high as 15 to 20 years. Currently, in this fund we are maintaining high maturities because we believe that current fundamentals demand much lower interest rates. Our funds, ICICI Pru Gilt – Treasury and ICICI Pru Short Term Gilt hold lower maturity government securities – close to 3 years at this point of time. We do not exceed 5 years of maturity in ICICI Pru Short Term Gilt Fund.

What is the fund management style of ICICI Pru Dynamic Bond Fund? 

ICICI Prudential Dynamic Bond Fund is an actively managed open-ended medium term income fund that intends to generate total return through a judicious mix of accrual income and potential capital appreciation. In general, the fund aims to actively manage duration in the range of 1 to 5 years, depending upon prevailing economic and market conditions and also with our view on interest rates. For economic & market parameters, we look at current account deficit, fiscal deficit, inflation, global energy prices and liquidity conditions while managing the fund. Currently we are overweight duration and the modified duration is currently 5 years.

ICICI Pru Long Term Gilt has given a return of almost 15% in the last 1 year which makes it a top quartile fund. What led to the outperformance?

We adhered to the discipline of maintaining maturities based on our view of the fundamentals rather than getting carried away by short-term volatility. This has contributed to stability and good medium term performance. Even currently, there is reasonable scope for yields to moderate and hence we continue to hold our long positions. Presently the portfolio maturity remains around 18 years.

Which debt fund category looks most attractive in the current market scenario?

Looking at the current scenario where RBI is somewhat behind the curve as far as monetary easing is concerned; we believe that short and medium term bond category looks most attractive from a risk-adjusted return perspective. From an absolute return perspective, long term gilt funds look most attractive.

What is your View on US Fed rate hike impact on debt market?

We could see start of rate hikes in September or October'2015. Initially they are likely to be gradual. There is a probability of Fed rates going up to 1.75% by December 2016. At the beginning of the Fed rate hiking cycle there is likelihood that we may see some short-term volatility in markets. With core fundamentals of our economy remaining strong like low CAD, benign inflation, higher foreign currency reserves, we are likely to withstand any near- term volatility.

What do you think will be the main triggers to watch out for with respect to G-sec yields?

Crude oil prices are a key factor to watch out for, as Crude oil impacts the currency and current account deficit situations. Also, monsoon is another important factor which could impact the food prices. Government policy on the fiscal front and efforts to contain retail inflation in light of uncertainty on monsoon could also have impact on overall inflation expectations.

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