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Nilesh Shah, CIO, Templeton AMC, on prospective Interest Rates Scenario.

"RBI does not have much scope for cutting interest rates in view of rising interest rates worldwide"

Nilesh Shah, Chief Investment Officer (CIO), Templeton India Mutual Fund, believes that interest rates will remain flat for the current quarter. A chartered accountant, cost accountant and inter-company secretary, Nilesh has been with Templeton since 1997. Prior to joining Templeton, Nilesh started his career with the merchant banking department of ICICI. He later moved to ICICI Securities before moving to Templeton as an analyst with global bond management team.

Nilesh manages all the debt funds at Templeton since inception - Templeton India Income Fund, Templeton India Liquid Fund, Templeton India Government Securities Fund and Templeton India Monthly Income Plan and recently started managing his first equity fund - Franklin India Equity Fund.

Q. Templeton India Income Fund notched up smart gains for the year ended March 31, 2000, giving a return of 14.65 per cent. The fund has also done well in the one-moth ended April 28 with the cut in CRR and bank rate on April 1. What is your opinion on the interest rate scenario now?
Nilesh: We expect interest rates to remain flat in the next quarter. The RBI has already cut interest rate at the beginning of the year. There is not much scope of cutting down the interest rates going forward. if u consider rising interest rates in the us and other nations in the G-7, there is a limit to which Reserve Bank of India can cut the interest rates.

Q. You had a 49 per cent exposure to Gilts as on March 31, 2000, concentrated largely in the long-end of the market. Despite the current round of rate cuts, there is an apprehension that the huge borrowing programme will negate the impact of the rate cut. Besides, with the government likely to borrow at the long end in order to strengthen that segment, one could see demand at the short and medium end, leading to price appreciation. Given this scenario, are you now beginning to shift your investments towards short-to-medium term?
Nilesh: Yes. We are looking to shift our portfolio maturity from long end to medium end.

Q. Do figures suggest a pickup in demand from the corporate sector?
Nilesh: We do not expect any large credit demand pickup from the corporate sector. At best we expect it to remain flat at last years level of + 12-15 % growth. This is manageable by the RBI. If the ADR issues lined up by the corporates go through, than we can see much less demand from the corporates.

Q In the event of the large govt. borrowing coinciding with demand for non-food credit, do you see RBI going for another round of interest rate cut?
Nilesh: As mentioned earlier, the RBI does not have much scope for cutting interest rates in view of rising interest rates worldwide. There is also a problem of higher inflation on last year's low base. The large programme is an issue but I think it can be managed on back of following factors.

a. High FDI and portfolio flows (with ADR money this looks like a record year)
b. Lower trade deficit on back of high software revenues and lower oil prices
c. Bigger space for monetisation as last year the RBI did not do much for monetisation
d. Higher liquidity on better forex flows.