INTERVIEW - Demand for debt will sustain amid rate rise - fund mgr

By Neha D'silva

MUMBAI (Reuters) - Investor appetite for debt will sustain for the rest of the fiscal year on waning supplies even as the market readies itself for a series of aggressive poilicy rate increases, a senior debt fund manager said on Wednesday.

Federal supply will drop as the government will sell less than half the amount it sold in the first half and its appeal as a savings instrument will stay as the nation lacks social security, said Maneesh Dangi of Birla Sunlife Mutual Fund.

"After a long time we are seeing the demand-supply situation is favouring bonds including state loans. This November-December we should have a bit of rally in bonds," said Dangi, who has 420 billion rupees of assets under management.

"In a country like ours where the social security is not in place demand for debt would always be larger than equity. Equity is s very small component of Indian savings about 6-7 percent 94 percent is still fixed income," he added.

The benchmark 10-year bond yield which had slipped to a record 4.86 percent after a hefty rate cut by the Reserve Bank as part of its stimulus package.

The 10-year yield has risen more than 200 basis points so far in 2009 mainly due to excessive debt supplies in the market.

The 10-year benchmark was trading at a yield of 7.27 percent at 4.50 p.m. and Dangi expects the yield to drop to 7 percent in a couple of weeks. He sees it trading in a 6.90-7.50 percent range for the next three months.

The Reserve Bank of India last week laid the groundwork for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of a threat from asset price bubbles.