Q&A: Sandesh Kirkire, Kotak Mutual Fund

Kotak Mutual Fund chief executive Sandesh Kirkire tells Priya Kansara Pandya why the rupee’s depreciation could continue and shares his outlook for the Indian equity markets. Edited excerpts:

The rupee has been depreciating against the dollar. How sustainable is this and why?
It may remain at 52–55 levels against the dollar and I believe we are in for a reasonably long period of depreciating rupee environment, till portfolio flows come back or capital foreign direct investment starts improving.

The dollar is in shortage, as there has been a flow of capital into dollars (despite the US getting downgraded) due to the euro problem. Second, I do not believe oil prices will come down. In spite of low growth, oil prices have not budged. However, I do not believe the $130-140 range movement for crude oil prices witnessed in 2008 is coming back. Third, $30 billion of India’s current account deficit of $55-60 billion is on account of gold imports. Global investors are buying gold due to fear and there is also supply constraint. All these are putting pressure on our current account deficit and currency.

Do you think a seven per cent inflation by 2011-12-end is achievable?
On a point-to-point basis, inflation will come down. But it will rise in 2012-13. As long as the currency is under pressure, inflation will not be something which can be ignored.

Is a seven per cent gross domestic product growth also achievable?
Our linkages with international markets are strong and growth cooling there will obviously have an impact on India. However, domestic consumption has not collapsed and it’s far superior than in 2008. I believe 6.5-7 per cent growth is sustainable in the next few years. For us to move back to an over eight per cent level, it’s imperative to have reforms and the global situation improves.

Do you think the Sensex can slip to 12,000 or even go below that?
The markets are not going to drop drastically like they did during the Lehman event, a financial accident. Secondly, India and China are the only two countries growing at over five per cent. Global investors cannot ignore India. Reforms are necessary to bring them back.

Thirdly, I bel-ieve 2012 should be better for equity because significant corrections have happened and we are close to historical lows. The current 15,000-16,000 levels are significantly cheaper than the 16,000 seen in 2007. If the markets drop 10-15 per cent from here, the valuation would be similar to the 8,000 levels seen during the Lehman event.

Do you expect more pressure on sales in the third quarter than expected?
Till the September quarter, sales growth had been upwards of 16.5-17 per cent, including inflation. The real growth could be 8-10 per cent. I believe this is possible for the whole financial year.

However, the domestic investment space, dependent on the government’s support and interest rates, has not done well.
 

There is not sufficient policy initiative. New investments are just not happening. I do not see a continuation of business flows in the infrastructure sector. Thus, we have been underweight on the invest-ment/infrastructure related sector (high beta). Valuation-wise, the infrastructure sector continues to be cheap and it’s getting cheaper by the day because of lack of visibility. However, since we do not see interest rates going up, we are looking at the sector more closely. We want to see order inflow coming in. Both will lead to the sector’s re-rating, which will be phenomenal.

Source: http://business-standard.com/india/news/qa-sandesh-kirkire-kotak-mutual-fund/459181/

Is this the right time to invest in debt funds?

With interest rates likely to soften, bond yields have come down, which means there is benefit in debt funds.

With the Reserve Bank of India (RBI) freezing the interest rates for now in its mid-quarterly monetary policy announcement on 16 December, the yields on 10-year bonds have come down in anticipation of softening interest rates in the next quarter or so. On 19 December, yields on 10-year bonds came down to around 8.35% from 8.48% on 15 December, a day before the policy announcement. The drop is sharper from the beginning of the month, 1 December, when yields were around 8.70%.

RBI has maintained status quo on key policy rates, including repo rate or the rate at which RBI lends to banks and cash reserve ratio (CRR), the proportion of deposits which banks have to necessarily keep with the regulator.

Typically, fall in bond yields and the rise in bond prices augur well for debt mutual funds (MFs). So is it the right time to invest in debt funds?

The link between rates, bond prices and debt MFs

Bond prices are inversely related to interest rates. When interest rates rise, the yields of new bonds rise, but prices of existing bonds fall.

In order to remain competitive with new issues, existing bonds alter their prices. For instance, suppose a bond priced Rs. 100 pays 8%. If the interest rate in the economy rises and similar new issues start offering, say, 9%, the prices of existing bonds would go down for competition’s sake. In other words, the face value of Rs. 100 may reduce to around Rs. 94 for new customers to give the similar returns. Generally, for every 1 basis point change in yields, 10-year bond prices increase or decrease by 20 paise.

One basis point is one-hundredth of a percentage point.

On the contrary, when interest rates decline, the price of existing bonds increases and bonds are often sold at a premium to the face value to new customers.

Bond prices affect debt funds directly since debt funds largely invest in bonds. Here, when the bond prices go up (as interest rates outlook is weak and thereby bond yields are down), the net asset value of the fund would also increase.

Interest rate scenario

The Indian economy is under pressure owing to successive rate hikes during the last two years coupled with lack of reforms. In the last couple of months, the Index of Industrial Production (IIP) has been on a decline. In fact, in October, IIP contracted to -5.1%.

At the same time, though inflation is still above RBI’s estimates, it seems to be cooling off. The Wholesale Price Index-based inflation for November was 9.1% compared with 9.7% a month ago, the first moderation in headline inflation in over a year. Even food inflation has recorded a sharp decline; it fell to almost a four-year low of 4.35% for the week ended 3 December.

In view of the above factors, bankers feel that interest rates would now go down. “Considering the two factors, we believe that the first turn in the monetary cycle could come in the form of a CRR cut and may happen as soon as in the next quarter amid expectations of large additional borrowings,” said Abheek Barua, chief economist, HDFC Bank Ltd​, in the bank’s post-policy assessment report released on 16 December.

Agrees Melywn Rego, executive director, IDBI Bank Ltd: “I foresee the banking sector to cut interest rates only when RBI starts lowering the prevailing repo rates. It could probably happen during the first quarter of 2012.”

Even the regulator has indicated that rates may head downwards soon. “The guidance given in the second quarter review was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” according to the press release issued by RBI on its mid-quarter policy review.

Should you invest now?

Experts say this is the right time... “In the future, in a falling interest rate regime, debt funds are likely to provide decent returns, particularly long-term debt funds,” says Dhirendra Kumar, chief executive officer, Value Research, an MF-tracking firm.

While all kinds of debt schemes benefit in a softer interest regime, the benefit is virtually negligible in case of liquid funds and the highest in long-term debt funds, including gilt funds.

A look at MF returns in the last fortnight shows that medium gilt and long-term funds as a group have turned out to be the best performers among all MF categories. According to date from Value Research, the group has provided an absolute return of 1.86% in the last fortnight closely followed by income funds, whose category average return stands at 1.03% in the same period.

“There are views expressed in some quarters that it is better to wait for one more policy review as it would provide a much clearer picture. But in my view, customers should try to invest before the interest rate cycle starts heading downward as that would ensure customers benefit throughout the downward interest rate cycle and for that, this is right time as interest rates may start declining in January. Even if RBI maintains status quo the next time around, the softer interest rate regime would not be very far,” says Rajan Krishnan, chief executive officer, Baroda Pioneer Asset Management Co. Ltd.

Rajan too favours long-term debt funds over short-term funds for those who are willing to take higher risk.

...but beware of the risks: In fact, you need to keep the risks in mind. In view of the depreciating rupee, inflationary pressure may come back to haunt again. In that scenario, the expected pace of interest rate moderation would slacken. And RBI has indicated such a possibility. “It must be emphasized that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,” RBI has said.

India is a net importer and with domestic currency depreciating sharply against the US dollar, the cost of import is on rise and that may lead to inflationary pressure domestically.

The other factor that can affect you adversely if you invest now is the level of government borrowings. While the news of the chances of the government borrowing exceeding its original projection (owing to not meeting the disinvestment target) is priced in the yields, the slowing economy will reduce government revenues, thereby increasing the fiscal deficit. The latter scenario would once again firm up the prevailing yields owing to tighter liquidity in the market. If yields rise, your investments made now may suffer.

Source: http://www.livemint.com/2011/12/20195201/Is-this-the-right-time-to-inve.html

ICICI AMC asks distributors to get active

The fund house is planning to de-empanel some distributors if they fail to achieve their sales target by 31st December 2011

ICICI Prudential Mutual Fund has asked some of its distributors across India to achieve a sales target by 31st December 2011, failing which they will stop paying trail commission to these distributors from January 01, 2012. The rationale behind ICICI’s move is that is a costly affair to service distributors who have less AUM with them.

The move has not gone well with a section of distributors who say that such a clause was not mentioned to them at the time of empanelment.

“Generating business has become increasingly difficult in tier two and tier three cities. At least they should reduce the target,” said a distributor who has received a letter from ICICI Prudential Mutual Fund.

Source: http://cafemutual.com/News/InnerNews.aspx?srno=973&MainType=New&NewsType=Industry&id=21