MR. DHAWAL DALAL

Mr. Dhawal Dalal joined Merrill Lynch Investment Managers i

n 1996 after receiving his MBA from the University of Dallas.

He worked with the Merrill Lynch Private Client Fixed Income Division for approximately a year.

He later joined Money Market Desk of Merrill Lynch Investment Managers. He returned to India in 1998 to join the Fixed Income Desk of DSP BlackRock Investment Managers Pvt. Ltd. (previously called DSP Merrill Lynch Fund Managers). He is currently Exec. Vice President and Head of Fixed Income at DSP BlackRock Investment Managers Pvt. Ltd.

Inflation has fallen substantially in last couple of months. What do you expect average inflation for FY14-15?
The decline in consumer price inflation in the last few months could be attributed to factors like positive base effect, gradual decline in fruits & vegetables prices, (which has around 7.3% weight in the CPI) and recent correction in the local diesel and petrol prices due to sharp correction in global crude oil prices. We expect consumer inflation to fall further to around 4.5% in November 2014.

From there on, we expect consumer inflation to inch higher from December 2014 as positive base effect wears off and it is likely to settle between 6% to 6.5% by March 2015. We are also closely observing prices of cereals & pulses for further impact on the CPI. Cereals and pulses have around 17% weight in the CPI.

Overall, we expect the CPI to average around 6% in 2015.

What do expect on interest rate front? When do you rate cut will be started?
The RBI has indicated possible reduction of interest rates in early 2015, subject to a favorable outcome of the following conditions:

• Strengthening of on-going disinflationary impulses
• Pace of change in public’s inflation expectations going forward
• Success of government’s efforts in achieving the fiscal deficit target for FY15

We believe that the RBI will likely announce the first reduction in the Repo Rate around Feb/March of 2015. We also expect the RBI to reduce the Repo Rate by 75 basis points cumulatively by March 31, 2016. Based on this we expect the benchmark 10Y goverment bond yield to trend towards 7 ½% in the next 12-15 months.

According to you, what investors should look before investing in Accrual funds?
Accrual funds should have a prudent mix of high yielding assets and high quality assets in the form of liquidity buffer. We advise investors to consider the following points before investing in accrual funds:

1. Investment horizon: We believe accrual funds are best suited for investors investing for at least three years.
2. Concentration risk: Investors should prefer a diversified portfolio in terms of sector allocation as well as issuer profile.
3. Liquidity risk: High yielding assets are generally illiquid. Therefore, a fund should have sufficient amount of liquid assets.

Please give some insight on your investment process.
We follow a top-down approach for our fixed income investments. We carefully study the existing macro-economic environment in order to get the big picture. We pay a lot of attention to both global and local economic factors, developments in the currency markets, near-term outlook on interest rates, fund flows, systemic liquidity, investor sentiment, demand-supply dynamics and other relevant factors. This helps us to gauge the sentiment.

At the micro level, we pay a lot of attention to investor behaviour to gauge their appetite for risk and whether investors are looking to invest more or to redeem. We also look at the relative positioning of various fixed income assets and expected returns of three major fixed income asset classes - money market assets, corporate bonds and government bonds - from a 3-month, 6-month and 1-year investment horizon. This is done to position our fixed income funds with an attempt to generate better risk-adjusted returns for our investors.

With a one year perspective, which category of funds look more attractive?
Our base case is for the benchmark 10Y government bond yield to trend towards 7 ½% in the next 12-15 months. Hence, we recommend investors to look at investing in income funds with longer average maturity with at least a three year perspective. We believe that investors will not only benefit from decent interest income, but may also be likely to enjoy the benefits of price appreciation amid prospects of a decline in bond yields.

Income funds are also ideal for investors for their long-term asset allocation needs. We advise investors to consider income funds for their fixed income asset allocation for their financial planning needs.