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'Economic projections are realistic'

November 05, 2003 15:32 IST
Last Updated: November 05, 2003 16:11 IST

Nilesh Shah, chief investment officer (debt), Franklin Templeton, has more than 10 years of experience in investment management. He maintains responsibility for the Indian fixed income market and the credit analysis of the South-East Asian countries. Prior to joining Franklin Templeton, Shah headed the structured products group at ICICI Securities and Finance Company.

In an exclusive interview with Personalfn, Shah shared his views on the monetary policy and what it holds in store for the economy and the fixed income segment.

What is your view on the monetary policy? Does it meet with your expectations?

Overall, the policy has met with our expectations barring the absence of a bank rate cut. The focus of the policy seems to be in delivering credit efficiently at lower rates to various sectors. It has indicated that the interest rates for smaller corporates and SSIs have not reached their desired level, despite the soft interest rate bias. Hence, the future focus is likely to be on the lower interest rate benefits reaching these smaller undertakings.

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Few of the clear positives in the policy have been a) the mandate given to IBA to develop a benchmark PLR. b) mandatory hedging of foreign currency loans which is a structural positive.

With most of growth drivers in the economy in place, the central bank seems to have chosen to focus on inflation management and credit delivery. It has indicated that it will continue to provide adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price levels.

However, the credit policy disappointed market participants, as the expected cuts in bank and repo rate did not materialise. Also, there was confusion as to whether the central bank's stance had shifted from soft rate bias to neutral or stable bias. (soft and 'flexible' interest rate environment) Popular belief is that there has been no bank/repo rate cut. Your views on the same.

Two factors- most of the growth drivers for the economy are in place and the fact that the benefits of lower rates are not percolating down the system, are to be viewed as the background for the central bank not cutting rates further. The lowering of inflation projection is a welcome sign.

The internal report on LAF, once disseminated could signal that the bank rate cut is losing significance and that LAF is emerging as a tool for managing liquidity. The central bank has also stressed the fact that monetary measures will be taken in response to market conditions and are not a factor of credit policy statements.

  • What kind of an impact do you think today's policy will have on income funds? In the light of the monetary policy, what is your view on the interest rates going forward? How do you see the 10 year benchmark yield reacting to the policy?

    The markets are expected to remain range bound with no major movement on either side, given that liquidity is expected to remain easy. There were no specific measures in the credit policy that curb liquidity.

    The WMA surplus being run by the government, FII flows and NRI remittances would help in maintaining liquidity in the system. Over all, it is too early to take definitive stance whether the central bank will adopt a neutral or stable stance on interest rates.

    Players will be closely watching the credit and inflation numbers before taking positions. The allowing of intra-day trading in government bonds, could boost volumes, reduce volatility and improve price discovery.

    The 10-year bond is expected trade in the 5.10-5.25% range and the ample liquidity is likely to ensure that the yield doesnt rise above 5.25-5.30% levels. Yields on long-date bonds could rise by 20-25 basis points, as the market would charge a "risk premium" for buying these securities since there were no positive triggers on the horizon.

    How do you read the macro economic scenario post the RBI's assessment of the recent performance of the Indian economy? Any trends that you wish to highlight which investors should look out for?

    We believe that the economic projections in terms of GDP and inflation are realistic in nature. However, one needs to keep in mind that the economic recovery during the last fiscal year is still far from leading into an investment cycle. We believe that it will take an extended consumption cycle before the investment demand cycle picks up.

    Please also share with us your views on Floating Rate Funds in view on the increased volatility in the debt markets.

    Floating rate funds provide market related rate of return at all point of time. It is a kind of passively managed fund. It is ideally suitable for people who wants stable rate of return without any volatility. This fund could also be an ideal investment option especially in a rising interest rate scenario. We recommend Floating rate Funds to the investors with conservative risk profile.

    Your advice for the retail investors.

    We do not expect interest rates to move down sharply from current levels and hence investors need to tone down their expectations from income funds. Going ahead, coupon income and trading gains will play a bigger role in the returns of these funds. Medium term bond funds, MIPs and Balanced Funds offer better potential from current levels.

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