The Hindu Business Line : Interest rates may stay soft for some more time: Suresh Soni

We expect inflation to rise in the next six months; the higher inflation would primarily be on account of fuel and food prices while core inflation indices may remain within acceptable limits.

SURESH SONI, CEO, DEUTSCHE ASSET MANAGEMENT INDIA

Suresh Parthasarathy

Mr Suresh Soni has over 16 years of experience in the Indian financial market and is currently CEO of Deutsche Asset Management (India). He shares his views on interest rates, scope for gilt and income funds and the future of the Indian mutual fund industry.

Excerpts from the interview:

What is your take on interest rates rising over the next six months to one year?

Fixed income markets are currently apprehensive about an impending hike in interest rates/tightening of liquidity in the system, in view of the likely increase in inflation and pick up in economic activity. We, however, believe that the interest rates may stay soft for some more time.

Economic recovery is at a nascent stage and the RBI is likely to keep liquidity easy, maintaining a benign interest rate scenario for some more time to support economic recovery. Further, credit growth in the economy has fallen significantly, from around 25 per cent last year to around 14 per cent this year.

A significant portion (around 70 per cent) of Central Government borrowing has also been completed, reducing supply over the rest of the fiscal.

We expect inflation to rise in the next six months; though a significant part of the higher inflation would primarily be on account of fuel and food prices while the core inflation indices (excluding food and energy) are likely to stay within acceptable limits.

The past year has been a volatile one for government securities. What returns can one expect from gilt funds?

Over the past few months apprehension about the increase in interest rates has led to a significant bearish trend in government securities (g-secs).

The ten-year government bond is currently trading at 7.1 per cent, a spread of 380 basis points over the overnight rates (call money rate is 3.25-3.30 per cent). This is among the highest spreads in the last decade.

Bond markets have already priced in an increase in interest rates (as indicated by the rise in long bond yields) and so we do not expect a significant rise in yields from these levels.

In the next few months if economic growth picks up, and government revenues maintain a strong trend, bond yields are likely to fall. We believe gilt and bond funds will deliver good returns to investors in the coming few years.

Why has the average maturity profile of your gilt schemes come down drastically in the past six months?

Over the last few months the bond market has been volatile. Given the negative news flow on inflation and interest rates, the fund had taken a defensive stance and lowered the maturity profile. We, however, actively manage our portfolio and are open to increasing the maturity profile once the markets stabilise.

Last year, income funds managed high returns. What is the potential for such schemes now, given that some of the NCD (non-convertible debentures) offered to retail investors are recording good yields?

Income funds cannot give high double-digit returns on a sustained basis. The returns in the last year that you are referring to were largely on account of the capital gains in the bond portfolio, on account of reduction in interest rates. For an investor the income fund should be positioned for stable returns. The allocation to income funds in a portfolio should be based on the individual investors risk profile.

Investment in NCDs depends on the comfort level and risk profile of the investor. Unfortunately, NCDs are not very actively traded in India.

The investor’s money is locked for a longer period of time. In case of an investment in income funds, while there can be volatility in the short term, returns are likely to stabilise in the medium term.

Also, income funds are easy to transact. Another point is that income funds are more tax-efficient than investments in NCDs.

Of late we hear that banks are parking significant sums with MFs. Where do you actually invest the money when credit offtake itself is low?

The mutual fund sector gets an opportunity to invest funds based on the instruments available in the market.

Mutual funds can choose from an array of instruments, such as T- Bills, Certificates of Deposit (CDs), commercial papers (CPs), non-convertible debentures (NCDs), repo, etc. While banks lend directly to the borrowers, MFs invest in market instruments (issued by various companies) through primary and secondary markets.

With entry loads being abolished, how long do you think the fresh inflows to equity funds will be depressed?

We understand in the near-term the new rules pose some challenges in distribution and fresh inflows for mutual funds.

However, over the long term, whatever is good for the investor is good for the industry. The SEBI move lowers the transaction costs and can attract new investors to mutual funds.

In the changed environment do you think there will be mergers and acquisitions in the MF industry?

Its sheer size and geography makes India a very unique market. The industry is growing and we see new investors coming into mutual funds as well as additional flows from existing investors.

As in any growing industry, the mutual fund industry could also see some M&A activity. We, however, believe that M&A activity in the industry would be acquisition and growth oriented.

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