Present debt market provides unique investment opportunity

India Infoline News Service | Mumbai |

There are signs that most of the decline in Rupee might be behind us and the currency bottom might approach sooner than later.

Market ride in the past few weeks was extraordinarily bumpy. We all know that RBI slashed liquidity in two tranches. One on 15th July and another on 23rd July; bringing systemic liquidity to 0.5% of NDTL; with penal rate of 10.25% on MSF borrowing. The intentions were clear, to make Rupee dearer in the banking system and finish any carry-trade possibility in the Forex market.
 
The choices for RBI seem palpably difficult, which it figuratively called 'Trilemma'. In the classic growth-inflation tradeoff, the third angle of sharply depreciating Rupee, has made currency management an imperative. Rupee has lost more than 26% value against the dollar in the last 2 years, of which, nearly 10% has been in the last four months. With international crude oil prices also beginning to rise, the risk of compounded inflation(through imports) was high, necessitating an aggressive intervention. At many levels, it is evident that a more robust and a coordinated policy response is needed to address the problem. Most of the policy response essentially seems monetarist in nature; and would serve to perhaps only plug/delay the forex gaps, without forcefully addressing the real problem - the trade and the current account deficit.
 
India imported nearly US$ 15 bn worth of coal, US$ 10bn worth of iron & steel and around US$ 83 bn worth of gold, silver and precious stones in FY13. A lot of these imports can surely be substituted in India - and with an ever more expensive dollar-perhaps more competently. For instance, in case of gold and silver imports, a bulk of the demand is for household savings requirement. A booming business environment with substantial investment opportunities can certainly offset a sizeable proportion of that component.
 
The point boils down to the fact that we need a very strong and robust industrial economy with an equally abetting infrastructure. Only this way can India provide an employment fillip to nearly 67% of its rural population engaged in agriculture. And it is through this medium that India's middle class aspire to generate further investment and growth opportunities. Urgent policy emphasis on productivity, both in capital and labor, is necessary in this regard. From the immediate viewpoint, equities and debt market, both, remain pegged to liquidity outlook. Liquidity in turn remains dependent on how does the Rupee stabilizesin the forex market. Having said that, there are signs that most of the decline in Rupee might be behind us and the currency bottom might approach sooner than later.
 
Were this to scenario come through, we can expect the present liquidity measures to easen up gradually, with swift reversal in the current monetary policy stance. From this standpoint, the present debt market provides a unique investment opportunity to not only capture high carry, but also seize the potential for modest capital gain from any rate reduction in future.
 

The author is CEO of Kotak Mutual Fund  
 

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