Better macros to prompt relook at rates, expect easing in 2017: Vijay Santhanam, Barclays India

With the Reserve Bank of India's latest rate cut, debt in vestors need to temper their expectations on in vestment returns, said Vijay Santhanam, head of risk solutions group, Barclays India. Gone are the days of 9-10% (investment returns in terms of interest rates) when inflation was soaring high in double digits. With 5% retail inflation, you really cannot harbour high hopes when investors are entering negative yield territory (losing money) globally, he told Saikat Das, in an interview. Edited excerpts:

What triggered the latest rate cut?

The benign consumer inflation number and the expected trajectory for the future seem to have given the Reserve Bank of India (RBI) room for easing rates. The focus has shifted to supporting growth apart from managing inflation. If the RBI's stand on real effective rates shifts to a lower range (in the context of global rates) as indicated, we can expect further easing in the future.

Do you expect another quarter percentage rate cut by March-end?

Further rate cuts will depend on global factors and inflation at home. The US elections and the Federal Reserve's policy on rates are two important events to watch out for, and RBI would take cues from them. An improvement in macro data will surely prompt the central bank to relook at rates again. We expect further easing in the first half of 2017.

With falling rates, what juice is left for debt investors?

We have seen a 100-200 basis points (rate yield) contraction in the past couple of years.We are now in a negative interest rate territory globally. Investors now need to change their expectations on investment returns.When inflation was at 8-10%, their expectations were much higher. With CPI (consumer price index) inflation at 5.05%, investment returns have to be lower. Globally, things are changing. The concept of 9-10% yield is not logical at this stage.

Will India continue to attract overseas inflows?

India continues to be attractive due to its macroeconomic story. Inflation numbers are coming off, and there's a clear commitment from the government that fiscal discipline will be maintained. We think India will be an investment destination and inflows will extend.

Can the narrowing gap between the US and Indian bond yields play spoilsport?

For serious long-term foreign investors, a 2550 bps rate increase in the US will not change their perspective on investing in India. Investors globally are looking for yield and good credit. What one needs to look out for is the projected future trajectory of rate hikes in the US -an aggressive cycle in 2017 and 2018 may lead to volatility and India will not be immune. But we expect India to be one of the better investment stories.

Domestic money is cheap. Does it make sense for Indian companies selling bonds in offshore markets?

For large corporates, there is clearly an opportunity given the attractive yields. Even if dollar borrowings are expensive compared to local borrowing on a hedged basis, it does make sense for corporates to tap offshore markets as it helps them diversify their borrowing base and tap larger sources of liquidity. Natural hedges make it more attractive for issuers. There are issuers who use the proceeds for their overseas operations only. We believe corporates will continue to tap overseas markets opportunistically.

Rupee is now fairly stable, but will the stability sustain?

India has been a standout. We have proven to people that we are a stable economy where overseas inflows are strong enough. Macroeconomic and political stability have given a lot of comfort, which is reflected in the currency. We expect the rupee to be stronger than its emerging market peers. However, gradual depreciation will continue.

How do you define the effectiveness of inflation targeting in India?

Globally, the framework for central bankers is inflation targeting. One has to assess other available instruments or frameworks to ensure the effectiveness of monetary policy. In the absence of an alternative, flexible inflation targeting will continue. It is a step forward and has worked well over the past three years.

Has comfortable liquidity helped in transmitting rates?

A large part of it is ongoing. About Rs 1 lakh crore has already come to the banking system through open market operations. This has helped in the rate transmission process. You are seeing transmissions now with money market rates coming off.

Will corporate bond market evolve with new measures?

For highly-rated companies, the bond market is really an attractive avenue. Corporates are now encouraged to tap this market. There is a tendency among companies to increasingly look at this segment. Eventually, companies will be more inclined towards corporate bonds, shying away from bank credit.The case for lower-rated companies is different with lower appetite in the bond markets.