In an interview to ET Now, Saurabh Nanavati , Chief Executive Officer , Religare Mutual Fund , presents his outlook on bond markets and Religare Medium Term Bond Fund .
Why have you timed this fund offering at a time like this because everyone believes that interest rates are only halfway on their up?
Interest rate hikes are almost done. We are expecting another 25 basis point hike in the Jan to March quarter but post that, interest rates should stabilise. This fund was missing in our product suite and we did a lot of research at the ground level where retail investors were very comfortable investing in bank deposits between 1 year to 5 years and what we thought was if we could come out with the fund where the mandate explicitly states that we will be investing in papers up to 5 years maturity and provide liquidity to the customer also backed by the tax efficiency of mutual funds and active fund management which could generate higher returns. The fund was pretty opportune for us in terms of launching at this point of time as also completing our product suite on the debt side.
You say that you expect rates to go up just by quarter percentage point maybe in January. The majority of people we speak to believe that rates will go up by 50 to 75 basis points maybe by July-August next year. So why do you believe that interest rate hikes are pretty much at the end of their climb up?
Inflation which is the key concern of the central bank is now coming down and it could perhaps even touch their targeted levels at 5.5%. Having said that, even the RBI report mentioned that there was an upward bias. Because of the last 3 months, what we have seen is commodity prices have moved up significantly, food prices have moved up, the oil price hike last week will add close to 60 basis points. So to that extent, there is an upward bias on the inflation target but from a rate hike perspective, what we have seen over last 18 months maybe another 25 basis points or at best another 50 basis points post which RBI will have an adequate enough buffer as compared with the developed economies and then they can again get back to focussing on growth in the coming year. So interest rates will stabilise from April onwards and that stabilisation in terms of interest rates not changing could remain for a one-year period.
What about the quarter third earnings that we will see trickle in in January? How big an important cue do you think would they be for the market as such and to provide direction? What is the Sensex earnings growth forecast that you have at Religare?
For the year ending March 2010, the Sensex earning was close to around 840. March 2011 will end at close to 1040 and one year down the line, March 2012, our estimate is close to 1250. So we are projecting an 18% to 20% growth rate for Indian corporates for next year.
You are expecting that interest rates will stabilise by April, why should I as an investor be putting my money into your fund right now if you are saying that interest rates will stabilise by April and that is really when a bond fund like the one you are offering today will actually start seeing the benefits of declining interest rates? Why should I put money in now?
This fund is not a close ended fund. It is an open ended fund. So investors can invest at any point of time and what we are basically telling investors to continue investing month on month, quarter on quarter in this fund. The reason why you should invest at this point of time, the short term rates are extremely attractive at this point of time. We are looking at a flat yield curve in India which does not do justice to an economy actually which is growing at over 8% at this point of time. So this yield curve flattening is purely because of liquidity pressures. If you look back in May 15th just before the 3G auction period, banks were actually parking close to 1 lakh crores with the central bank and if we fast forward 6 months from there, at this point of time they are borrowing close to 1.5 lakh crores from banks. So the shift has been from positive 1 lakh to negative 1 lakh which is almost 2 lakh crores and because of that liquidity tightening phenomena, you are getting one year to 18 months bank CDs and corporate bond papers at anywhere from 9.5% to 10.5%. These levels are very very attractive. So if we can basically buy these bonds at this point of time and the one of the fund objective is also to hold these papers to maturity as far as possible, the investors will benefit by investing in these papers. 12 to 18-month segment is extremely attractive at this point of time.
If I could just point you to the fund offer document that you have put out. On the one hand you are talking about interest rates on 6 month to 2 year having risen by about 150 to 300 basis points. In the same document you talk about liquidity pressures in the system which are beginning to decline. Now everyone knows that interest rates at the shot having gone up is largely on account of the liquidity tightness. So these 2 comments in the offer document. Do not they run contrary to each other?
The liquidity crunch is a technical phenomena. It is primarily because one at this point of time the money in circulation with public has increased substantially to close to 80,000-90,000 crores in the last 9 months and because of negative real interest rate phenomena, they are not investing. The other aspect is government has close to 75,000 crores in the RBI account which traditionally would be at 5000 to 10000 crores only. So the government is not spending enough. We expect liquidity conditions to start easing from next quarter as compared with this quarter. The minute liquidity conditions start easing, the shorter term rates will come down. The other factor which you are pointing to is much longer in nature, much more fundamental based while the liquidity phenomena is a technical factor at this point of time.
Source: http://economictimes.indiatimes.com/opinion/interviews/investors-will-benefit-by-investing-in-religare-bond-fund-saurabh-nanavati-religare-mutual-fund/articleshow/7132957.cms?curpg=2
Why have you timed this fund offering at a time like this because everyone believes that interest rates are only halfway on their up?
Interest rate hikes are almost done. We are expecting another 25 basis point hike in the Jan to March quarter but post that, interest rates should stabilise. This fund was missing in our product suite and we did a lot of research at the ground level where retail investors were very comfortable investing in bank deposits between 1 year to 5 years and what we thought was if we could come out with the fund where the mandate explicitly states that we will be investing in papers up to 5 years maturity and provide liquidity to the customer also backed by the tax efficiency of mutual funds and active fund management which could generate higher returns. The fund was pretty opportune for us in terms of launching at this point of time as also completing our product suite on the debt side.
You say that you expect rates to go up just by quarter percentage point maybe in January. The majority of people we speak to believe that rates will go up by 50 to 75 basis points maybe by July-August next year. So why do you believe that interest rate hikes are pretty much at the end of their climb up?
Inflation which is the key concern of the central bank is now coming down and it could perhaps even touch their targeted levels at 5.5%. Having said that, even the RBI report mentioned that there was an upward bias. Because of the last 3 months, what we have seen is commodity prices have moved up significantly, food prices have moved up, the oil price hike last week will add close to 60 basis points. So to that extent, there is an upward bias on the inflation target but from a rate hike perspective, what we have seen over last 18 months maybe another 25 basis points or at best another 50 basis points post which RBI will have an adequate enough buffer as compared with the developed economies and then they can again get back to focussing on growth in the coming year. So interest rates will stabilise from April onwards and that stabilisation in terms of interest rates not changing could remain for a one-year period.
What about the quarter third earnings that we will see trickle in in January? How big an important cue do you think would they be for the market as such and to provide direction? What is the Sensex earnings growth forecast that you have at Religare?
For the year ending March 2010, the Sensex earning was close to around 840. March 2011 will end at close to 1040 and one year down the line, March 2012, our estimate is close to 1250. So we are projecting an 18% to 20% growth rate for Indian corporates for next year.
You are expecting that interest rates will stabilise by April, why should I as an investor be putting my money into your fund right now if you are saying that interest rates will stabilise by April and that is really when a bond fund like the one you are offering today will actually start seeing the benefits of declining interest rates? Why should I put money in now?
This fund is not a close ended fund. It is an open ended fund. So investors can invest at any point of time and what we are basically telling investors to continue investing month on month, quarter on quarter in this fund. The reason why you should invest at this point of time, the short term rates are extremely attractive at this point of time. We are looking at a flat yield curve in India which does not do justice to an economy actually which is growing at over 8% at this point of time. So this yield curve flattening is purely because of liquidity pressures. If you look back in May 15th just before the 3G auction period, banks were actually parking close to 1 lakh crores with the central bank and if we fast forward 6 months from there, at this point of time they are borrowing close to 1.5 lakh crores from banks. So the shift has been from positive 1 lakh to negative 1 lakh which is almost 2 lakh crores and because of that liquidity tightening phenomena, you are getting one year to 18 months bank CDs and corporate bond papers at anywhere from 9.5% to 10.5%. These levels are very very attractive. So if we can basically buy these bonds at this point of time and the one of the fund objective is also to hold these papers to maturity as far as possible, the investors will benefit by investing in these papers. 12 to 18-month segment is extremely attractive at this point of time.
If I could just point you to the fund offer document that you have put out. On the one hand you are talking about interest rates on 6 month to 2 year having risen by about 150 to 300 basis points. In the same document you talk about liquidity pressures in the system which are beginning to decline. Now everyone knows that interest rates at the shot having gone up is largely on account of the liquidity tightness. So these 2 comments in the offer document. Do not they run contrary to each other?
The liquidity crunch is a technical phenomena. It is primarily because one at this point of time the money in circulation with public has increased substantially to close to 80,000-90,000 crores in the last 9 months and because of negative real interest rate phenomena, they are not investing. The other aspect is government has close to 75,000 crores in the RBI account which traditionally would be at 5000 to 10000 crores only. So the government is not spending enough. We expect liquidity conditions to start easing from next quarter as compared with this quarter. The minute liquidity conditions start easing, the shorter term rates will come down. The other factor which you are pointing to is much longer in nature, much more fundamental based while the liquidity phenomena is a technical factor at this point of time.
Source: http://economictimes.indiatimes.com/opinion/interviews/investors-will-benefit-by-investing-in-religare-bond-fund-saurabh-nanavati-religare-mutual-fund/articleshow/7132957.cms?curpg=2
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