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RBI policy: Need to look at medium term trends, FTI says

Investors with higher risk appetite and longer term horizon could look at long dated/gilt focused funds, Santosh Kamath says

April 02, 2014 3:26 IST | India Infoline News Service
Although wholesale price index (WPI) inflation has edged towards RBI’s comfort zone of 5%-5.5%, headline and core CPI inflation still remain at elevated levels (near 8%). Also, in an election year, dole outs might end up in fiscal pressures and increased consumption that could be inflationary in nature.

We need to also keep in mind that fuel prices in India are still not fully aligned to global price movement, and there is seasonality in vegetable prices. These risks could keep policy rates at current elevated levels for an extended period of time. We therefore need to look at medium term trends rather than near term data points, Santosh Kamath, CIO-Fixed Income, Franklin Templeton Investments-India, said.

We also have a large government borrowing calendar for the upcoming fiscal year, with around 60% of the borrowing scheduled in the first half of the fiscal. Due to this large supply of government paper expected by the markets, government bond yields have not witnessed a drop commensurate to the recent sharp moderation in inflation.

On the macro front, although things have improved considerably on the twin-deficit front, economic growth and industrial activity still remains quite sluggish. As a result, we continue to remain cautious and expect better visibility of interest rate direction in the coming months, depending on incoming data. Meanwhile, on the political front, a stable coalition government will be positive for bond markets, Kamath added.

We continue to believe that accrual focused funds can help investors navigate the current uncertain environment. Investors with higher risk appetite and longer term horizon could look at long dated/gilt focused funds, Kamath further said.

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