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Business News/ Industry / RBI’s start-and-stop cuts threaten bond fund flows
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RBI’s start-and-stop cuts threaten bond fund flows

The allure of such funds could fade as this month's 13- basis point jump in 1-year interest-rate swaps shows receding hopes for easing, says LIC Nomura

Photo: MintPremium
Photo: Mint

Mumbai: Inflows into Indian sovereign-debt funds are seen slowing by some money managers as traders pare bets central bank governor Raghuram Rajan will cut interest rates again soon.

LIC Nomura Mutual Fund Asset Management Co and PNB Gilts Ltd. say the allure of such funds could fade as this month’s 13- basis point jump in one-year interest-rate swaps shows receding hopes for easing. The so-called gilt plans took in Rs1,810 crore ($291 million) in January, a fifth month of inflows, data from the Association of Mutual Funds in India show. That was down from Rs2,090 crore in December.

Rajan, who unexpectedly cut interest rates last month, refrained from easing further at a 3 February review as he waits to see Prime Minister Narendra Modi’s first full-year budget on 28 February. He also flagged risks to India’s inflation from potentially deficient monsoon rains, a rebound in oil prices and volatility in global markets. Ten-year sovereign bonds have fallen in February, snapping a five-month rally.

“From a sense of euphoria that rate cuts are going to come thick and fast, there’s been a dampening of spirits," Killol Pandya, a Mumbai-based senior fixed-income fund manager at LIC Nomura, which manages Rs7,620 crore, said in a 18 February phone interview. “Investors with a short-term view aren’t really interested in investing" in gilt funds in the long run, he said.

Money-market funds lured a net Rs85,850 crore in January, after witnessing withdrawals worth Rs1.03 trillion in the previous two months, AMFI data show.

Monetary policy

Governor Rajan cut the benchmark repurchase rate by 25 basis points in an unscheduled move on 15 January, the first reduction since May 2013, as plunging Brent crude prices helped restrict consumer inflation below the RBI’s 6% target. He held the rate at 7.75% this month, highlighting the need for the government to improve public finances in Asia’s third- largest economy to sustain lower price increases.

Finance minister Arun Jaitley has pledged to reduce the fiscal deficit to a seven-year low of 4.1% of the gross domestic product in the year through 31 March. The shortfall breached the full-year target of Rs5.31 trillion in the nine months ended December, official figures show.

“Key to further easing are data that confirm continuing disinflationary pressures," Rajan said in the 3 February policy statement. “Also critical would be sustained high quality fiscal consolidation," he said, suggesting that government spending needs to shift away from social welfare programs and subsidies on food and fuel toward building roads, storage facilities and bridges.

Sovereign bonds

“The RBI will keep a close eye on the budget, which will reinforce the government’s commitment to the fiscal consolidation roadmap," analysts at STCI Primary Dealer Ltd., including Bansi Madhavani in Mumbai, wrote in a 16 February report.

Ten-year government notes rallied in the last five months as slowing inflation boosted the odds of monetary easing. The yield on India’s 8.4% sovereign securities maturing in July 2024, the current 10-year benchmark, fell to 7.69% on 30 January, from 8.56% end-August. The rate has risen two basis points, or 0.02 percentage point, this month through Wednesday. Indian bonds and currency markets were shut Thursday for a local holiday.

SBI Funds Management Pvt., a unit of India’s largest lender, sees the rise in yields as short-lived and expects demand for gilt funds to be sustained.

‘Very positive’

“Inflows are likely to continue on the back of easing expectations," Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds, which manages Rs72,760 crore, said in a 18 February phone interview. “We are very positive on government- bond investments and expect the yield to drop in line with cuts in interest rates."

Radhakrishnan forecasts a 75-basis point decrease in the repo rate by March 2016 and predicts the 10-year yield to be 60 to 70 basis points lower by then.

The cost to lock in borrowing costs for a year has jumped 17 basis points to 7.65 percent since reaching a July-2013 low on 2 February, a day before the central bank policy, showing that rate-cut bets are receding. February’s 13-basis point increase has put the one-year swaps on course for their biggest advance since January 2014, data compiled by Bloomberg show.

The rupee has weakened 0.8% this month to 62.34 a dollar after climbing 1.9% in January.

“In the short-term, gilt-fund inflows may be impacted by investors’ re-assessment of the timing and quantum of rate cuts," Vijay Sharma, executive vice president for fixed income at PNB Gilts in New Delhi, said in a 18 February phone interview. “People are a bit cautious about the budget and its impact on the monetary policy." Bloomberg

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Published: 20 Feb 2015, 08:44 AM IST
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