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RBI scope for rate cut drives IDFC Asset’s bullish bond call

LiveMint logoLiveMint 21-08-2017 Subhadip Sircar

Mumbai: The Reserve Bank of India (RBI) will have room to cut interest rates again as it grows more confident inflation will stay anchored, boosting the attraction of mid- to long-maturity bonds, IDFC Asset Management Co. says.

The RBI may decide it prefers real rates below the current level of around 2.5%, said Suyash Choudhary, head of fixed income at the Mumbai-based asset manager, which oversaw the equivalent of $9.6 billion at the end of June. Choudhary calculates the real rate by taking one-year treasury bill yields and subtracting average inflation.

“If global conditions remain benign, we think over a period of time RBI may settle for lower positive real rates in India, which may open up the scope for the next 25 or even 50 basis-point easing,” Choudhary said in an interview last week. “We do not see why not to buy bonds at this juncture.”

The RBI cut its benchmark repurchase rate to 6% from 6.25% on 2 August to help revive an economy held back by Prime Minister Narendra Modi’s steps last year to withdraw some currency notes. Some of the “upside risks to inflation have either reduced or not materialized,” the central bank said in its policy statement.

Indian consumer-price inflation accelerated to an annual 2.36% in July from 1.46% a month earlier, data released last week showed. That’s still down from as high as 11.51% in November 2013. The central bank targets a rate of around 4% on a medium-term basis.

Inflation still remains low in India and any pressure from the demand side is still absent, Himanshu Malik, a strategist at HSBC Holdings Plc in Hong Kong, wrote in a note Thursday. The bank has a long position in 13-year government bonds, as well as a received position in five-year offshore swaps, he said.

IDFC holds Indian bonds due between five and nine years in its longer bond portfolio, and also likes securities due between 12 and 15 years.

“As asset allocators, it is a good market to be in as volatility is low and you are getting decent carry on all places on the yield curve,” Choudhary said. “One should not prejudge how soon or late gains are going to come, as long as the environment is benign enough to continue to run positions.” Bloomberg

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