Post yesterday's release of macroeconomic date on IIP (abysmally
low of 2%), there is once again lot of buzz regarding interest rate cuts. we
are grabbled with 2 major issues ie current account deficit (CAD) & inflation.
While WPI has softened to sub 5%, CPI at around 9% level is still a major
concern for the policy makers.
Rupee has already breached 58 mark which will make
imports more expensive especially oil & gold which
constitutes a major chunk of our CAD. For sure, this will lead to
inflationary pressure.
The recent hike in the import duty for gold to
8% will have less impact as we have seen in the past. Indians have emotional
attachment to this yellow metal and is being used as a hedge against
inflation.
The size and funding of the current account deficit will
remain a key concern as macroeconomic and political uncertainties
may result in sporadic portfolio outflows and foreign direct investment (FDI)
inflows may not record a broad-based pickup. While deregulation of interest
rates on Non-Resident External (NRE) and Non-Resident Ordinary (NRO) Accounts
by the RBI in December 2011 contributed to a surge in inflows in 2012-13,
additional NRI Deposits are expected to be moderate in FY14 in line with a
likely softening of domestic deposit rates. Moreover, the sizable short-term
external debt stock continues to pose refinancing risks, even as the recent
depreciation of the Rupee would add to the costs of debt servicing.
Given the above, it's going to be far more challenging
to manage growth & price stability. As I see, RBI may not tinker with the
interest rates at this juncture and would rather focus on doing something to
protect rupee falling further.
For investors wanting to play the duration game, this may not be an opportune time to invest in long duration funds. Short term funds would provide relatively a better risk adjusted returns.
ramanathan
