($1 = 81.9050 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)
By Dharamraj Dhutia
MUMBAI, April 25 (Reuters) - The shorter end of the
Indian government bond yield curve looks attractive right now as
the central bank is unlikely to cut interest rates this
financial year as inflation risks prevail, a fund manager at
Aditya Birla Sun Life Asset Management Co said.
"We believe the front end of the yield curve, in the 1-3
year range, offers the best risk-adjusted returns to investors,"
said Mahesh Patil, chief investment officer at ABSL AMC, which
manages 1.42 trillion rupees ($17.34 billion) of debt.
The 1-3 year yields were trading around 6.90% on the day.
And while the benchmark 10-year bond yield was at
7.10%, Patil does not expect it to sustain below 7.15%.
India's headline retail inflation eased to 5.66%, within the
Reserve Bank of India's (RBI) tolerance band of 2%-6%, in March
and is expected to dip below 5% in April.
Patil, however, said the recent easing in inflation was
mainly due to a base effect.
"Core inflation remains sticky and close to the 6% level.
There is an upside risk to food inflation given weather
conditions and the risk of El Nino."
Nonetheless, the RBI unexpectedly maintained the status quo
on interest rates earlier this month, defying market
expectations of a 25 basis points hike. However, policymakers
said further hikes could be warranted to bring inflation to its
medium-term target of 4%.
But Patil expects the RBI to stay on a prolonged pause as
rates are close to the long-term average, although he says the
Federal Reserve may continue with its rate-hiking cycle.
Patil further said that a higher supply of domestic debt and
tighter liquidity conditions may warrant open market purchases
from the RBI in the later part of the financial year.
"So we believe that while supply is high, it will continue
to get demand. The question is of whether sufficient demand is
there at current rates or somewhat higher rates."
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