Arvind Chari, fund manager, Quantum Mutual Fund advises investors looking for investment options to consider debt instruments like fixed deposits (FDs) and fixed maturity plans (FMPs). He expects interest rates on FDs and market instruments for 1-3 year to remain stable at over 9%.
"We believe that given that the deposit growth rate is weak, banks would be unable to cut deposit rates despite any eventual repo rate cuts," he said in an interview to moneycontrol.com.
Further, he doesnt see the central bank slashing interest rates in the upcoming monetary policy. "We believe that rate cuts are possible only on some rupee appreciation; sharp fall in oil prices and drop in food prices or a combination of these three in different measures," he added.
Meanwhile, Chari is optimistic that the government will be able to accomplish the fiscal deficit target. "Given that this years numbers were made with tax increases and not expenditure cuts, we believe that the chances of the Government achieving are far higher and credible than last years," he elaborated.
Below is the edited transcript of Charis interview with moneycontrol.com.
Q: Is this a good time to be investing in debt schemes, considering there is a higher probability of interest rates declining from hereon? Also, what is your outlook on interest rates over the next 3 months?
A: For investors, investing in FDs and FMPs, has been a good option for the last 2 years and it continues to remain so. Interest rates on FDs and market instruments for 1-3 year are stable at over 9% and are likely to remain so.
We believe that given that the deposit growth rate is weak, banks would be unable to cut deposit rates despite any eventual repo rate cuts. Hence, fixed deposits and FMPs should continue to remain attractive in the 1-3 year segment.
On interest rates, we do not expect any rate cut by the RBI in the July policy. We believethat rate cuts are possible only on some rupee appreciation; sharp fall in oil prices and drop in food prices or a combination of these three in different measures.
Q: Where do you see the new 10-year bond trading at over the next couple of months? How do you see RBIs open market operations impacting yields?
A: We do not expect any OMO in July and maybe even in the first part of August as we expect liquidity to remain in a comfortable deficit. So, bond yields might inch up by end July with the high supply pressures without OMO
Q: There is a debate on whether high interest rate is the main reason for choking growth? What do you think?
A: Nominal interest rates can never be the main reason for choking growth. Real rates, when measured by CPI, are still very much in negative territory which means that monetary conditions are easy.
It is more of sentiment that is the actual reason. In a capex, interest rates wont be more than 5% of the overall project cost. So, it cannot be the deciding factor.
Q: What is your hunch? Will the government be able to stick to its fiscal deficit target?
A: Given that this years numbers were made with tax increases and not expenditure cuts, we believe that the chances of the Government achieving are far higher and credible than last years. We havent revised our numbers yet and believe in the governments target.
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