Pick fixed-income products of 3-12 month maturity

For the last couple of months, one of the most discussed topics has been where to invest in the current scenario of high inflation and slight moderation in growth. Before coming to various options, lets highlight our view on inflation and growth.

In our opinion, the prevailing, high single-digit inflation is due to a rise in the prices of primary articles, higher commodity prices and structural changes in the economy. Though we continue to see correction in food prices, higher commodity and crude oil prices and structural changes in the economy still pose a considerable risk. Thus, inflation will remain sticky and a top priority for the Reserve Bank of India (RBI) over the next few policy meets.

Higher interest rates, tight liquidity conditions, base effect and delayed project approvals have led to low, single-digit Index of Industrial Production (IIP) numbers over the last few months, raising concerns about a slowdown in growth. However, data on other indicators such as tax collections (up 26 per cent during April-February 2011), loan growth (buoyant, at 21.4 per cent), auto sales (up 26.2 per cent during 2010-11) and manufacturing PMI coming in at 57.9 in March 2011, remain robust. Therefore, we believe there will be a slight moderation in growth in the near term and not a slowdown.

Given the high inflationary concerns and higher inflationary expectations and the moderation in growth, we think the RBI is expected to continue with its anti-inflationary stance by raising interest rates and keeping liquidity tight in the banking system. So, we expect another rise of 50 basis points in 2011.

We believe the current scenario of high interest rates and tight liquidity to persist for the next few months due to the points discussed above. We feel fixed income products, with average maturity of 3-12 months, will offer attractive risk-returns to the investors. Investors can look at products which can lock in the prevailing, high interest rates without having any significant mark-to-market risk. Fixed income products such as fixed maturity plans (FMPs) and short-term income funds can be considered.

Investors can look at income fund towards the end of the second quarter of 2012, as we will have better clarity on 1) RBI’s further rate rises 2) Concerns on fiscal deficit for 2011-12 due to food and oil subsidies (due to higher crude oil price) and, therefore, its impact on the longer end of the curve. Till then, investors should try to maximise risk-return by taking advantage of higher short term rates.

The author is CIO, JP Morgan Asset Management. The views expressed are personal.