We are looking at extended rate pause for good part of FY-24: Lakshmi Iyer

“The target or the goalpost is 4% and of course you have that leeway of give or take 2%. So on that yardstick, definitely you are within the realms of the reach but clearly if you pinpoint the bull’s eye, you are some distance away,” says Lakshmi Iyer, Kotak Investment Advisors.

An extended announcement or policy that already was on guard, an extended pause in the rate hike. What will you say?
Absolutely. Looks like the gratification or those that were seeking gratification, in terms of at least an indication towards is the RBI going to pivot, I think for those sections of the market, clearly, there has been some disappointment. But otherwise, it looks like the policy decision was pretty much bang on. It does make sense from a domestic macro perspective also to stay on hold, not to mention the fact that even the global headwinds, which are currently quite palpable, clearly warrant an extended pause.Let us talk about the inflation targets. For FY24, it is marginally less from 5.2 to 5.1%, but the emphasis is on getting it down to 4%. Now, I want to understand from you, does this mean that even if it’s a pause but higher interest rate will be a scenario for a longer term or slightly more than what we all expected if it’s 4%?
The target or the goalpost is 4% and of course you have that leeway of give or take 2%. So on that yardstick, definitely you are within the realms of the reach but clearly if you pinpoint the bull’s eye, you are some distance away. Even if we look at the aggregate for FY 2024, it is likely to be closer to the 5-5.25% range. So I think what it also means is that if globally, which is specifically the US, you start getting cues of a pause, maybe after one more rate hike at max, I think that will give much more comfort to the policy makers also in India because if you notice, there was 5:1 voting to retain the withdrawal of accommodative stance.

So while the majority still believes that this should be the way forward, I think when the US starts probably pivoting or talking towards a rate cut in future, I think that is when, of course, inflation definitely is important, but it is going to be very difficult to envisage that the globe starts easing interest rates and India would probably wait for a more durable reduction. In fact, India is doing much better than the globe with respect to the inflation numbers.

But then what about the commodity prices which were factored in even in the governor’s speech where if the monsoon, which have arrived finally a week later though and that has never happened in last seven years, if the trajectory over a year goes off track from the monsoon perspective, we would see the inflation target being revised again?
That is a possibility right now but at the current juncture, honestly, it would not really be a base case assumption given the fact that even as we speak right now, we are a good 60 to 70 basis points under shooting of RBI’s own quarter one projection of inflation. And even if inflation actually surfaces because of the probability of say an El Nino increasing, could the impact be a 20, 30 basis points uptick on inflation and maybe an equal amount of reduction in growth? I think those are something which will evolve over the next two quarters. So I think it is fair to say for the good part of FY 2024, I think this would be the extended rate pause that we are looking at.

So looking at the current stance, how do you think the bond yields are expected to move or earlier when we spoke, you mentioned that it is going to be a very range bound movement? Obviously we will have to see the developments, how it is happening globally, but so far it is the same status?
Absolutely. In fact, I must say that the bond yields have almost discounted anything and everything that can potentially go right. And with this, Canada surprise rate hike and prior to that Australia rate hike, bond yields are kind of getting into a small consolidating groove.

US yields are also high. So I think maybe near term yields could rise a little bit. Again, nothing very materially significant but I still maintain that that range of five-six bps lower end to another five-six bps higher end with fulcrum being in and around the 7% mark could well be the direction for the 10-year benchmark in India.

6.9 to 7.15%, is that the range that we can expect it to move?
I think that is a fair range that we can go with.

So now keeping this particular range in mind and also considering that the interest rate that people are seeing on the fixed income, including your fixed deposit, any short term play, is that recommended?
Well, at these levels given that the portfolio carry or the yields are looking still reasonably high, it is a great opportunity to try considering looking at investments in the band of two to five years rather than keeping yourself too much on the lower side, given the fact that over the next maybe three to four quarters, the reinvestment risk which means the same money which matures and you get it back, the chances are that you could redeploy that at a lower level, I think that probability is reasonably high.

So I think two to five year bucket is a great window of opportunity whether you buy it through term deposits, through direct bonds, through AIFs or through mutual funds.

So because FD ladder is quite a trendy concept these days, everywhere on social media, we are seeing people making videos and helping people understand what exactly it means. You are trying to say that FD ladder is something that you should avoid or maybe just do it for not more than three years, right now, if you want to?
So right now, as I said, the sweet spot is right there in the centre where you can probably stagger depending on what your liquidity needs are, but trying to, if the liquidity requirements are not very near term, then try to position yourself somewhere in the three to five year bucket. It could be a combination of term deposits because there you compromise on liquidity and good quality bond portfolio or direct bonds. Combination of these three is what you could certainly look at.

For medium to longer term, maybe for five to seven years if one wants to stay invested for that particular time horizon, you think that there will be a benefit of capital appreciation and one can really look at it if that is the strategy?
Absolutely. In fact, we have already seen traces of that over the last not just one quarter but over the last three to four quarters, because a year back where we were to where we are today rates have clearly come lower. So definitely one can probably extrapolate that. It could be more of a frustrating sideways movement in the very near term but who said these portfolio constructions are for the next three days or three weeks, these are clearly with about three years at least in mind, and there the potential for capital gains in this portfolio still remains live.

Any take on floating interest rate bonds or funds?
So usually floating interest rate instruments or funds are a great friend to have when you expect interest rates to keep rising or just at the start of the rate cycle. We are at neither junctures right now. So whether it is on your investment side, it definitely makes sense for you to try to have more fixed rate instruments or portfolios which have higher fixed rate instruments which can allow you to enjoy the carry and not reprice itself lower. Well, if you are a borrower, definitely floating rate is not a bad bet.

And the EMI not going down soon?
Well that, as I said, is also a function of how soon you start seeing banks or non-banks try to reset rates lower. Our sense is it will happen but surely with a lag. Liquidity is coming back into the banking system. So that usually precedes resets on the loans. So not like today, tomorrow, but certainly over the medium term, you could expect some of that with a lag of two quarters.