Mutual Funds

Aditya Birla Sun Life MF expects sharp decline in food inflation to partially normalize, 10-yr bond in 7.10-7.70% range

Aditya Birla Sun Life Mutual Fund expects a sharp decline in food inflation to at least partially normalize in 2019 towards 4.5 percent range

Given the decline in inflation led by sharp fall in food inflation, the fund house expects policy bias could change to neutral in February policy,according to the fund.

He noted crude price and fiscal stance in an election year will be key risks in 2019. NBFC slowdown and weak global growth are other worrisome factors.

“Headline inflation consistently undershot RBI and consensus forecast through the year and trended towards the lower end of RBI target range story in 2018. The divergence between the core and non-core inflation remained quite high,” said Maneesh Dange, CIO-fixed income, who was addressing an event on Debt Market Outlook 2019.

According to Central Statistics Office (CSO), retail inflation plunged to a 17-month low in November at 2.33 percent, mainly on account of decline in prices of kitchen essentials like vegetables, eggs, and pulses.

Retail inflation, which is calculated on the consumer price index (CPI), for October 2018 was revised slightly up at 3.38 percent from 3.31 percent earlier, data from the Central Statistics Office (CSO).

Inflation figures for the month of December will be detailed next week.

The fund house envisages marginal uptick in growth to 7.2-7.5 percent in FY20 (7.2 percent in FY19) provided there is a stable government and moderate global growth slowdown.

Dangi said high capacity utilisation should drive nascent investment recovery. Moreover, lower crude price, peaking banking sector NPAs (non-performing assets), the possibility of a rural stimulus and election-related spending are other opportunities.

“Public capex into infrastructure will continue to drive investments, we are witnessing early signs of revival in private capex as well,” Dangi said.

“If global sentiments do not worsen significantly and we have a stable government post general election, then we are set up for further pick-up in investment cycle in 2019,” he added.

Assuming crude at average $65 per barrel, the fund expects current account deficit (CAD) to be around 2.2 percent of gross domestic product (GDP). India’s current account deficit widened to a four-year high of 2.9 percent of gross domestic product in the July-September quarter.

Dangi believes the 10-year government bond is trading in a neutral zone currently and expects it to continue to trade in the range of 7.10-7.70 percent in the first half of the calendar year.
Speaking about rates on short term money market instruments, Dangi said short term rates have peaked for this cycle so have AAA Corp spreads. 1-3 year bonds wind-down the extra spread in the run-up to March/April as huge open market operations (OMO) start to improve in inter-corporate deposits (ICD’s).

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