Dhawal Dalal
Dhawal Dalal – Senior Vice President and Head – Fixed Income
Mr. Dhawal Dalal joined Merrill Lynch Investment Managers in 1996 after receiving his MBA from the University of Dallas. He worked with the Merrill Lynch Private Client Fixed Income Division for approximately a year. He later joined Money Market Desk of Merrill Lynch Investment Managers. He returned to India in 1998 to join the Fixed Income Desk of DSP BlackRock Investment Managers Pvt. Ltd. (previously called DSP Merrill Lynch Fund Managers). He is currently Senior Vice President and Head of Fixed Income at DSP BlackRock Investment Managers Pvt. Ltd.
(1) What are your views on the current debt market scenario?
In our view, the interest rate cycle in India has peaked. Since early 2010, the RBI has increased the benchmark Repo Rate 13 times to 8.50% in response to surging inflationary pressures and higher consumption. These rate hikes are exhibiting their desired impact on both inflation, which is trending down gradually, and consumption, which is showing ample signs of weakening. Almost all growth indicators such as HSBC PMI, Auto Sales, IIP, OECD India CLI are suggesting that momentum is slowing. In addition, headline inflation is also likely to decline in the first-half of 2012 due to previous rate hikes and base effect.
Going forward, India’s GDP growth is likely to soften in response to a combination of both external and internal factors. Market participants expect the Reserve Bank of India to inject liquidity in the banking system and cut rates to support economic growth. This should result in the softening of short-term rates. We expect short-term rates to fall by 50 to 100 basis points in 2012 in response to the RBI’s rate cuts and improvement in systemic liquidity.
At the same time, higher government borrowing in the next year may keep long-term rates elevated due to supply pressure. This should result in steepening of the yield curve. We also expect more credit downgrades in 2012 due to cyclical reasons. This may result in the widening of credit spreads between AAA and non-AAA rated assets.
(2) DSP BlackRock Bond Fund, DSP BlackRock MIP Fund, DSPBlackRock Strategic Bond Fund have been consistent performers in the short and long run. What strategies can be attributed to the fund’s steady show?
We believe that our active fund management style coupled with our accurate reading of the interest rate cycles is instrumental in the consistent performance of our funds. Additionally, our rigorous analysis of fundamental and technical factors has helped us in optimally positioning our portfolios on the yield curve based on our short-term views on interest rates. Our focus on high credit quality and liquid fixed income assets has also helped us to trade efficiently in a relatively illiquid market.
(3) How do you see macro economic outlook taking into consideration a sluggish growth and persistent elevated levels of inflation?
Our macro-economic outlook suggests that while the economic growth may remain weak for the next two quarters mainly on account of slowing business investments and sluggish demand, headline inflation could buck the declining trend if crude oil prices in the global markets go up sharply. At the same time, if the rupee depreciates against the dollar, it could add to inflationary pressures. Moreover, a healthy monsoon this year could revive rural demand which has been holding up well. This could also keep inflationary pressures higher.
(4) In your opinion when do you believe RBI will start monetary easing?
Subject to the emerging trend in the core inflation for the month of December 2011, we expect the Reserve Bank of India to cut interest rates in Q1 of 2012. The Reserve Bank of India has also been purchasing bonds through their Open Market Operations since November 2011. This has significantly improved the sentiment and systemic liquidity in the banking system. However, we believe that the Reserve Bank of India will ensure that the core inflation is softening before deciding on quantum and timing of rate cuts.
(5) How do you see fiscal deficit problem panning out in the next fiscal year and its impacts on India’s economic growth and its impact on interest rates?
India’s fiscal deficit has been higher than budgeted 4.6% this year on account of higher expenditure and lower revenue collection. Market participants expect the fiscal deficit to settle between 5.5% and 6% this year. Our expectations for the fiscal deficit next year is around 5.5%. We also expect the gross borrowing to be somewhat similar to the revised gross borrowing this year. This should result in a sustained supply of government bonds even while the Reserve Bank of India is preparing for a series of rate cuts. As such, we expect a steepening of the sovereign yield curve with short-end of the curve falling more than long-end of the curve.
(6) How do you see the growth trajectory of the economy to unfold in the coming fiscal?
Market participants believe that revival of economic growth will be a function of both interest rates as well as pro-growth economic policies. Much will depend on the outcome of state elections and next Union Budget. While global growth is expected to slow down in 2012 due to the sovereign debt crisis in the Euro zone, we expect India’s healthy local demand along with the improvement in business climate to support our growth from falling below 7% next year.
(7) What would be your advice to retail investors, considering the volatility in equity markets?
Retail investors are advised to stick to prudent asset allocation between equity and fixed income assets even during volatile market conditions. We are at an interesting point where interest rates are higher and equity valuations appear attractive. As such, it is well worth reconsidering asset allocations and making appropriate changes. We also advise investors to consider investing in short-term funds as well as dynamic bond funds as these are suitable for credit conscious investors looking at long-term asset allocation.
Source: www.mutualfundsindia.com