RBI unlikely to cut CRR by 75 bps: Lakshmi Iyer, Kotak Mutual Fund

In an interview with ET Now, Lakshmi Iyer , Head of Products & Fixed Income , Kotak Mutual Fund , talks about fiscal deficit and what can be expected from RBI's monetary policy on 15th of March. Excerpts:

ET Now: The deficit in the financial system has climbed to Rs 180,000 crore. How much worse do you believe it is going to get? Do you believe that when refunds from the MCX IPO start coming back, the situation could look a little better?

Lakshmi Iyer: The MCX IPO is one of the problems which have added to the further liquidity issue. However, that is a thing of the last couple of days. We have seen this liquidity go into the negative zone significantly beyond the RBI's comfort zone for quite sometime now.

Our take is that if there is no CRR cut on March 15th, which is the next monetary policy date, this liquidity situation could further aggravate. This is due to the advance tax which is likely to be in the band of about Rs 50,000 to Rs 60,000 crore and that could take the number to anywhere between the Rs 2,20,000 to Rs 2,30,000. So, the combination of CRR cut and open market operations is what would lead to better liquidity numbers from here on.

ET Now: Montek Singh Ahluwalia said that the interest rate is going to be determined predominantly by what is likely to happen to the fiscal deficit. Where do you see interest rates stabilising in light of that and what is your reading of the yield on the 10 year bond?

Lakshmi Iyer: Fiscal deficit is definitely a challenging situation for the government for FY12 and it would continue to remain a predominant factor determining the direction of rates for 2013. This is because the fiscal deficit is funded through government borrowing programme. Moreover, it is subscribed to buy Indian investors predominantly and to a certain extent FIIs.

So, our take is that if the borrowing programme is likely to shoot up for FY13, which is a resultant of the higher fiscal deficit, we could see some more upward pressure on the 10-year benchmark rates from these levels. It is currently trading at about 8.2%. It could back up by about 10 to 15 bps, taking it on to 8.35%. So, we need to wait and watch out. We are likely to see near term volatility at the shorter end because of liquidity and the longer end because of the uncertain fiscal outlook.

ET Now: Do you believe that the RBI could surprise on the upside by coming out with a higher than a 50 bps CRR cut on the 15th? Do you think that RBI will cut CRR by 75 bps or even a 1% cut to address the challenges that the market is facing?

Lakshmi Iyer: I am not sure that is something which the RBI would want to do right now given that it continues to do open market operations. Today the open market operations figures have topped Rs 1 lakh crore and we still have liquidity continuing to be in the deficit mode.

My sense is that 50 bps is what we are likely to see as a CRR cut. RBI may introduce it in graded phases - may be 25 now and 25-25 in three tranches. This will probably total to 75 bps. But at a stretch going into 75 looks a very low probability given the fact that RBI continues to be committed to do OMOs. Today's market situation clearly warrants open market operations.

ET Now: Do you believe that a combination of that plus CRR cut would likely to sooth liquidity and also bring yields to stable levels?

Lakshmi Iyer: The CRR cut will give some respite on liquidity. It will not lead to a significant soothing on the yield curve front because March is a typical period of historical tightness and liquidity and this March will not be an exception. The liquidity situation is likely to ease only towards the last week of March or probably in the first week of April. So, that is when we could see a transition of the current high state of yield curve to a softer yield curve in the first quarter of FY13.

We are not expecting significant respite even if there were to be a CRR cut of 50 bps or 75 bps on March 15th. If the market gets a sense that the current open market operation trend is likely to continue, then we could see some small respite at the longer end of the GSEC yield curve.

Source: http://economictimes.indiatimes.com/opinion/interviews/rbi-unlikely-to-cut-crr-by-75-bps-lakshmi-iyer-kotak-mutual-fund/articleshow/12056116.cms?curpg=2

Equity linked savings scheme trumps PPF on returns

A penny saved is a penny earned. In the long run, those who follow this simple yet very powerful principle would probably be more financially sound than those who don’t. And those who go one step further by not just “saving” but “investing” in appropriate asset classes and products would likely benefit all the more.

Equity Linked Savings Schemes (commonly known as ELSS schemes) offered by mutual funds combine these two principles to create a product that not only help investors to save tax but also has the potential to help build wealth in the long run. However, ELSS funds differ from most of the other tax saving investment instruments in terms of their risk-return characteristics and for that reason, many investors tend to prefer traditional tax saving investments over ELSS funds.

Fidelity Worldwide Investment conducted a study based on the historical long-term performance of ELSS funds in the Indian mutual fund industry. As a first step it identified all the open-ended ELSS funds which have been in existence for more than 10 years (in existence since October 2001) and then calculated the CAGR of each of those funds for a five-year period at every month end starting from October 2006 to October 2011. 

This resulted in a total of 61 data points, the first five year period was from 31-Oct-2001 to 31-Oct-2006 and the last five year period was from 31-Oct-2006 to 31-Oct-2011. Further, using the above performance numbers we calculated the simple average performance of these funds for each of the time periods. Lastly, the results were compared against the rate of return that investors in PPF or NSC would have earned for each of those five year periods.

The results clearly show that ELSS funds’ average returns have been better than PPF/ NSC in 58 out of 61 periods and average five year annualised performance of ELSS funds was 26.43 per cent as compared to average PPF rate of 8.32 per cent and average NSC rate of 8.59 per cent — an out performance of 18.11 per cent and 17.94 per cent respectively.

In other words R1 lakh invested in ELSS funds on an average would have grown to R 3,23,036 in a five-year time-frame whereas the same amount invested in PPF or NSC would have grown to just Rs 1,49,120 and Rs 1,50,317 respectively. It was also interesting to learn that more than three times out of five, ELSS funds outperformed PPF by over 10 per cent on an annualised basis.

Like evaluating any other investment option, it is equally important to understand the associated risks. As the study revealed the range of returns from ELSS funds over different time periods and the divergence of returns (and hence the risk) reduces with increase in investment horizon.

For example, over a three-year period, the average CAGR of ELSS funds have been in the range of 9.15-76.75 per cent but if the investment horizon is increased to 5-years, the return range narrows down to 7.03-53 per cent.

Like most equity funds, ELSS funds also tend to be volatile in the short term but have the potential to help investor generate wealth in the long run. Their wealth generation potential along with the compulsory minimum investment period of at least three years makes it a great investment option for investors looking to benefit from tax deductions under Section 80C.

Source: http://www.indianexpress.com/news/equity-linked-savings-scheme-trumps-ppf-on-returns/916999/0