'Invest in gilt funds for better yields'

Murthy Nagarajan, head of fixed income, Tata Mutual Fund

Murthy Nagarajan, head of fixed income, Tata Mutual Fund is of the view that it is a good time for investors to invest in gilt funds. In an interview with Yogini Joglekar and Neelasri Barman he explains, "after the pause indicated by the Reserve Bank of India (RBI), we may see rate cuts from next financial year. If that happens then gilt funds will outperform." Edited excerpts:

The RBI has indicated a pause in rate hikes in the last monetary policy. When do you expect rates to start falling?
If inflation moves down, as per expectations, then it will touch 7% by March. Due to this movement, you can start expecting rate cuts by the RBI in the next financial year.
Food inflation is at a nine-month high of 12.21%. What reasons do you attribute this trend to?
For the last three years we are seeing that food inflation has been a problem. Globally also it has been a predicament throughout. There have been instances where we have seen prices in India ruling still lower than what are prevailing outside. So there is limited flexibility at our end. In addition, agricultural land is sinking. Since the monsoon has been very good, the people's purchasing power has increased. Hence, good monsoons are the core reason for food inflation.
The gilt market sentiments do not seem to improve at all. The Reserve Bank of India (RBI) is yet to conduct open market operation (OMO) of gilts. When do you see this happening? In the event of no near-term OMOs where do you see the yield on the 10-year gilt?
Our expectation was that RBI would go for an OMO in the coming 15-20 days, but with recent petrol price hike, it's difficult to predict now. So, we feel it could happen in the coming month also when the inflation numbers come down. If OMOs happens then the yield of a 10-year benchmark gilt would be in the range of 8.70-8.75% by December.
Your debt offerings include many fixed maturity plans (FMPs). Will FMPs continue to be the most preferred product?
FMPs will continue to be the most preferred, but these rates will not remain for long, so it's the best time to put money in FMP as rates are at decent level. Besides FMP, duration products will be the flavour of the season. Because, if we see inflation below 7% next year and RBI cutting rates then in this case investors are sure to get decent returns. Under duration product, gilt funds are the ones we expect to outperform. The point is that, in the last 10 years we have not seen yields hovering around 9% levels. We have seen such a phenomenon only in 2008 and a period before that and after that prices had fallen sharply. 9% rates are decent rates. So it's a very good time to invest in gilt funds. Retailers should buy a 30 -year paper as this will give those 9% yield plus the capital gains too. Going forward if the RBI starts cutting rates, this will be the first segment to outperform other debt funds.
What is your outlook on the rupee against the dollar till December?
Rupee will be under pressure. The scope for rupee to appreciate now looks difficult. In the near term say by December, it will be in between Rs 48-50 per dollar. All the Asian currencies will depreciate. When risk aversion fades and people start taking risks, only then can our currency appreciate.
In the second quarter review of the monetary policy held last month the RBI had cut the gross domestic product (GDP) growth forecast to 7.6% from 8% earlier due to poor investment demand and slower growth globally. Do you think we will be able to achieve 7.6% growth? Can you support it with reasons?
Rural demand is still going strong and I think we should be able to clock in around 7% if not 7.6% growth. The Prime Minister's Economic Advisory Council (PMEAC) is still maintaining it at 8% unlike the RBI. And 7.6% is the number given by International Monetary Fund as well and the main drivers will be the rural demands.