Interviews ‘Interest rates likely to decline over the next few years’

‘Interest rates likely to decline over the next few years’

Mahendra Kumar Jajoo - Head - Fixed Income, Mirae Asset MF shares his outlook for the fixed income market.
Nishant Patnaik Oct 28, 2016

Can you take us through your fund management strategy?

Our fund management strategy focuses on comprehensive analysis of various factors affecting fixed income markets for projecting outlook for important variables like interest rates and liquidity trends. The factors that we analyse include amongst others global environment, inflation, credit pick up, fiscal balance situation, central bank policy stance, system liquidity indicators etc. We focus on getting our projections as close to actual outcomes.


What is your outlook for fixed income market for the next two years? What kind of returns should investors expect from debt market?

We expect interest rates in India to keep declining in a structural fashion over the medium term. There could be intermittent periods of volatility. Unless there are indications of a change in structural story, we would expect a strategy of buying on corrections to be an appropriate one.


Where do you see the direction of yield curve in the near to mid-term? What will be the key driving force for yields?

In the very near term, a likely hike in Fed policy rates, rebound in oil prices and some reversal in foreign flows, if at all, may put pressure on interest rates. However, in the long term, we remain positive. As mentioned, Fed rate change and the markets response will be the key driving factor in short term. In the long term, structural changes currently underway in India will eventually guide the direction of interest rates, which for now is firmly for softer rates.  


What are the key risks for the debt market at this juncture?

The key risk for now remains a reversal in global capital flows, if that were to happen.


With the new governor coming in, what do you expect from the central bank? Do you anticipate further rate cuts this financial year?

RBI operates under an institutional framework and all governors are focused the same way on containing inflation and encouraging growth. The new governor, being the architect himself, will naturally ensure policy continuity. At the same time, a fresh perspective from him will allow further evolution of policy framework. The Monetary Policy Framework will also bring structural changes. We expect one more rate cut in the next quarter, subject to global developments.

SEBI has hiked exposure limit to housing finance companies HFCs for debt funds to 10%. How will this benefit investors?


HFC are fast growing segment.  Highly rated HFCs that focus on low/medium cost housing generally represent good credit quality. So investors get an opportunity to participate more in a fast growing segment.  

Credit funds and gilt funds have not done very well during three and five-year period. It is just around 30 to 50 basis point above the average liquid fund returns. Why do you think is that so?

Over the past 3-5 years, interest rates have not changed on a net basis in a meaningful way. There have been phases of decline and rise in rates during this period. There have also been phases of very difficult situation in credit markets. With higher expenses than liquid funds, a past analysis would suggest that these funds have done a reasonable job. In our view, dynamic bond fund category has a better prospect in adjusting to and benefit from such fluctuating interest rate environment. 


Which category of debt funds would you recommend investors at this juncture?

We expect interest rates to decline over the next few years. There could be volatility. So dynamic bond fund category may be ideal to sail through this volatility. But each investor has to evaluate her specific investment objective and risk appetite and accordingly take a decision. I suggest investors to take advice from advisors.


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