interest rate view

Post yesterday's release of macroeconomic date on IIP (abysmally low of 2%), there is once again lot of buzz regarding interest rate cuts. we are grabbled with 2 major issues ie current account deficit (CAD) & inflation. While WPI has softened to sub 5%, CPI at around 9% level is still a major concern for the policy makers.

 

Rupee has already breached 58 mark which will make imports more expensive especially oil & gold which constitutes a major chunk of our CAD. For sure, this will lead to inflationary pressure. 

 

The recent hike in the import duty for gold to 8% will have less impact as we have seen in the past. Indians have emotional attachment to this yellow metal and is being used as a hedge against inflation.

 

The size and funding of the current account deficit will remain a key concern as macroeconomic and political uncertainties may result in sporadic portfolio outflows and foreign direct investment (FDI) inflows may not record a broad-based pickup. While deregulation of interest rates on Non-Resident External (NRE) and Non-Resident Ordinary (NRO) Accounts by the RBI in December 2011 contributed to a surge in inflows in 2012-13, additional NRI Deposits are expected to be moderate in FY14 in line with a likely softening of domestic deposit rates. Moreover, the sizable short-term external debt stock continues to pose refinancing risks, even as the recent depreciation of the Rupee would add to the costs of debt servicing. 

 

Given the above, it's going to be far more challenging to manage growth & price stability. As I see, RBI may not tinker with the interest rates at this juncture and would rather focus on doing something to protect rupee falling further.

For investors wanting to play the duration game, this may not be an opportune time to invest in long duration funds. Short term funds would provide relatively a better risk adjusted returns.

ramanathan