Market Voice: Alok Singh, BNP Paribas Mutual Fund

'Provision to choose differential interest rates can innovate products'

BNP Paribas Mutual Fund says the Reserve Bank of India (RBI) latest hike in repo rate was on expected lines, and it’s still a level playing field for the country’s banks — big and small. Only, there will be some volatility in terms of the savings bank interest rates in the short term, Alok Singh, head of the company’s Fixed Income and Structured Products, tells Puneet Wadhwa. Excerpts:

The Reserve Bank of India (RBI) has hiked repo rate by 25 bps (basis points) in its latest review of the Monetary Policy. Was this in line with your expectations?
Yes, the rate hike has been on expected lines. RBI has been guiding it, and the Street expected a hike in repo rate by 25 bps.

The central bank has also deregulated the savings bank rate with immediate effect. What prompted the central bank to do so? Was this expected?
There are two things to this. The governor has been talking about deregulating the interest rate on savings bank deposits for some time now. RBI had already hiked the rate once earlier in the year to 4 per cent from 3.5 per cent. So, this was expected to happen.

However, the fact that it has happened in this policy review is surprising. The reason for the deregulation having happened this time, we believe, is because RBI is almost done with the policy rate hikes – a fact that has been acknowledged in the policy statement.

How do you read into this development? Do you feel that the bigger banks will be more aggressive in attracting deposits and the smaller ones will be muscled out?
Not really. It is not a fight between the big and small banks. Even now, it is a level playing field. We believe that it has to do with the overall package.

There has to be some rationalisation in terms of what is the cost of servicing a small savings bank account, because they have to further lend the money raised through this at a rate which is sustainable and does not attract bad debt. We believe that there will be some volatility in terms of the savings bank interest rates in the short term.

For savings bank deposits of over Rs 1 lakh, banks can now provide differential rates of interest if it so chooses. Will this create unhealthy competition among banks in their bid to attract a large deposit base?
We won’t say unhealthy, as the banks were offering a plain vanilla product and asking to follow a set of guidelines. With this development, banks can now innovate and design products. Some of them will succeed. It will take some time to settle down.

RBI has revised the GDP (gross domestic product) growth projection for its fiscal year 2012 downwards to 7.6 per cent. However, it has kept its March-end inflation projection unchanged at 7 per cent. Do you expect more rate hikes in the remaining part of the fiscal?
RBI is dealing with a lot of uncertainties. There are factors that are beyond its control. RBI governor has put a low probability to the possibility of a hike in interest rates in the future. It is fair to believe that RBI is done with the rate hikes for now.

Given the developments, would it make sense to invest in rate sensitives at the current juncture?
Yes, I think that one may invest in interest rate sensitives. The interest rates have reached a plateau. They are expected to remain there for some more time. The worst has already been delivered. It is a now a matter of holding on, as the RBI is in no hurry to cut interest rates. It makes sense to take a fresh look at rate sensitives now.

Should one look at fixed income products? How should one re-balance the portfolios, given the current macro-economic conditions? Where do you see the bond yields heading?
Certainly. Till now, there were two things that were driving up the bond yields – hawkish stance of RBI and the supply-side pressures. So, one uncertainty has been settled for the time being; it is likely to remain like that. The only thing that remains unsettled is the supply-side pressure.

The additional Rs 53,000 crore supply (borrowing) has already been factored in at the current levels. The only thing that can further unsettle it is more supply. The possibility of that looks remote at the current juncture.

What is your near-to-medium term outlook on the G-Sec yields?
The G-Sec yields will largely remain stable around the current level, +/- 10 basis points. RBI can resort to open market operations but the current situation does not warrant it.