‘Fiscal deficit is near-term concern’

Namdev Chougule, Vice-President and Head Investments - Fixed Income of JP Morgan Asset Management joined the fund house in 2007.

Since then, one of the strategies of the fund house has been to increase retail participation in its debt schemes, he says. In an interview with Business Line , he spoke about his outlook on interest rates and inflationary pressures and factors affecting them, among other things.

Where do you see interest rates going at this point?

Our view is that for the next two-three years for the GDP growth rate to come back to 8 per cent trajectory is very difficult.

So even if we average around 6-6.5 per cent in the next two years, current repo rate is still looking higher than we expect it to be. We expect a 50-100 basis points rate cut in the next 6-12 months period. But timing becomes very difficult to predict at this point of time because there are too many factors for the RBI to consider before the rate cut. I don’t want to comment on when exactly they will cut it. But yes, in the next 12 months we think the interest rates are going to go down.

How do you think this will impact the debt schemes of mutual funds?

Debt fund category should do well. We have seen good inflows since June. In fact, we have almost doubled our assets under management in June and we are getting good flows, especially in the longer tenure.

We expect the money will continue to flow because people are ready to accept the fact that there is more room for rate-cut. We have seen the RBI acting and providing more liquidity to the system. One-year CD (Certificate of Deposit) rates have dropped from 11 per cent in March to 8.60 currently. That’s the kind of rally we have seen. We are comfortable and we think going forward there will be more flows into debt funds.

Have you seen retail participation in debt schemes increase?

Our focus is to get more and more retail participation into fixed income funds which have traditionally been an institutional product.

Today, about 20-30 per cent of our debt AUM (assets under management) is retail which was almost negligible a year back. We are actively involved in investor education. We have just seen retail participation but the efforts have been on for three to four years now.

What kind of debt products are you recommending to your retail investors?

We have four flagship fixed income funds – J P Morgan India Liquid Fund, J P Morgan India Treasury Fund, J P Morgan India Short-Term Fund and J P Morgan India Active Bond Fund. So, Liquid and Treasury have more to do with the daily cash management, while short-term is for somebody who has an investment horizon of six-nine months. Active Fund is recommended for those who want to invest with a two-year time horizon. We are segregating products as per investor need.

What are the near-term concerns that you think will affect interest rates?

The most important factor, which the RBI has also highlighted in various policies, is the fiscal deficit. A loose fiscal policy creates demand-led inflation in the long-term. I believe a fiscal consolidation by the Government is what the RBI is looking at before it acts on further rate-cuts.

The Government has periodically said that they are also conscious about fiscal deficit. The moment the RBI sees strong Government action on fiscal consolidation and gives a roadmap for how they are going to reduce the fiscal, then they will be comfortable to go for further rate cuts.

What would be a comfortable level for fiscal deficit?

If in the next two-three years we come closer to three per cent that will be a comfortable position for India’s economy. For us to grow at a certain pace as an economy, we need to have a controlled fiscal deficit.

How long will it be before we see inflationary pressures coming down?

Inflationary pressure also is not just because of demand, it is also supply driven. There are a lot of things on the supply side where we have to look at the investment side of the economy, which is not happening.

In the last two years, the Government’s policies were almost paralysed.

The Government had done little to improve the investment climate.

It’s a deep cyclical problem which we are facing because of the various issues that the Government has.

But these are not as bad as other economies. We can still come out of this. We are not into a structural problem, we are into a cyclical problem.

sneha.p@thehindu.co.in