‘Investors should be ready to re-invest at lower rates’ :: Business Line

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What is your view on interest rates for the coming year?

 The simplest way to look at interest rates is in the context of the 400 basis points-plus decline in CPI inflation since the beginning of this year. This is likely to sustain in the years ahead, given the dual commitment from both the RBI and the Government to maintain a low and stable inflation regime. This has provided a structural reason to be bullish on interest rates. Indeed, fixed income investors have already been rewarded with a 100 basis points-plus rally in bonds over the past several months.

Given this, it is reasonable to expect the pace of fall in rates to slow from here. A lot will depend on whether the Government’s fiscal and food management policies can help inflation fall below 5.5 per cent on a sustained basis. If this happens, then the scope for further meaningful fall in interest rates opens up for the year ahead.

Your advice to investors

Investing has to fulfil certain objectives, and a key objective for fixed income investors has to be plugging reinvestment risks in the current environment. If inflation continues to trend lower and the savings-investment gap keeps narrowing, it is plausible that maturing investments have to be renewed at lower rates. This wasn’t the case over the past few years when high inflation and a larger savings-investment gap ensured that maturing investments always found similar or higher rates for re-investments. Hence, investors need to consciously change their investment strategy and increase the average maturity of their underlying portfolio to allow for and hedge against the possibility of re-investment risk in the new macro-economic context.

What are the risks?

If capital productivity, and hence growth, does not pick up in the year ahead, the perceived improvement in India’s overall credit metric may begin to get jeopardised. We may lose our recently won protection against global capital volatility, with consequent implications for domestic financial assets.