Yadnesh Chavan, Fund Manager – Fixed Income, Mirae Asset Mutual Fund says that better liquidity and higher real interest rate on inflation index bonds will see active participation from mutual fund houses.
RBI has recently hiked repo rate by 25 bps and cut MSF rate by 25 bps, what would be the impact of this on debt market? Where do you see the bond yields heading? What is your medium term view on the debt side?
RBI focused mainly on curbing inflation. Data shows that manufacturing inflation is 2.03% while onion itself is contributing 57 bps to WPI. If we exclude both manufactured goods and onion, still the inflation is very high. Hence, it’s not just onion and oil adding woes to inflation. Perhaps this would be a one of the reasons behind RBI’s focus on taming overall inflation. Apart from this, RBI also wanted to protect currency from global events.
RBI wants to tame CPI which is hovering around 9.7%. We believe that longer end of the curve will remain range bound between 8.2% and 8.7%. Keeping in mind the upcoming elections, festival season and delay in Fed tapering, the yield will start inching up and it will not fall below 8.2%. However, there is a possibility that yields will cross 8.7% mark due to concerns of fiscal slippage in the market.
Short term rates will completely depend on liquidity conditions. Since RBI has tried to provide ample liquidity, we expect that the rates will be realigned with prevailing MSF rate of 8.75%. Also, other rates like CD, CP will also come in line with MSF in the near future.
Do you expect that the RBI to further hike rates in its forthcoming policy meet?
Future course of RBI is dependent on global events like US tapering, situation in other emerging markets etc. Also, RBI will continue to focus on curbing CPI in future too.
FMPs were the flavor of the season throughout the year when interest rates were high. Will FMPs continue to be attractive in 2013-14?
A few months back, we saw volatility in debt market which spooked many investors. Since FMP matures on or before date of maturity of investment, it reduces the risk associated with volatility. Hence, it will continue to remain attractive at least till the rising interest rate cycle continues. Also, I can’t see any chance of reduction in rates at least for one to one and a half year.
RBI has on Tuesday announced that it will sell inflation index bonds soon based on CPI to retail investors. How can mutual funds participate in this market?
The Inflation indexed bonds based on the CPI will be more relevant from the retail investors prospective. They will act as an alternative investment to gold as a hedge against inflation. However we believe retail investors need a lot of education which can be imparted by the RBI or intermediaries.
The improving liquidity in this market and higher real interest rate on IIBs will see active participation from mutual funds.
What category of funds would you suggest to investors at this juncture?
Right now, we are recommending investors to invest in short term bond funds with a horizon of one to one and a half year. I believe that investors can get best risk adjusted returns in short term bond funds.
What is your strategy to shield your portfolio in these tough times?
Our strategy is to increase exposure to high quality debt instruments preferably banks CDs and AAA rated bonds. Though there are some good companies with AA rated ratings, we have avoided risky bets. Many credit rating agencies like CRISIL, ICRA are of the view that possibility of credit risk is higher at this juncture. Hence, it’s better off to stay away from such paper and take safer route.
How are you managing the volatility in debt funds?
We are not increasing our duration. Also, we have invested in shorter end of the curve to check volatility in debt market.
Fed reserve has delayed its winding up programme. How do you assess the impact of fed tapering programme (if it begins) on Indian market?
The delay has bought relief to Indian economy. It’s very certain that Fed will taper its quantitative easing programme any day. In the recent past, we have witnessed some positive signs in Indian economy such as stability in rupee movement, Sensex touching 21k mark, foreign funds inflows and so on. RBI and Indian government have got some time to prepare themselves and so far, both have done well. I believe that we are now in a position to sail through this situation depending on quantum of tapering.
What kind of products are you planning to offer on the fixed income side?
At Mirae, we think about investors first. While launching an NFO, we focus on products that will make money for our investors. At this juncture, we have a plan to hit the market with a few FMPs. We are optimistic that our FMPs will give good returns to investors in this volatile time.
