Taper wont impact markets much, but domestic factors will

Written by Jash Kriplani | Updated: Nov 28 2013, 22:40pm hrs
QE tapering is unlikely to have much impact on debt markets, says Jitendra Arora, senior vice-president & fund manager, investments (debt), ICICI Prudential Life Insurance. In an interview to Jash Kriplani, he says domestic factors such as fiscal deficit would have a much larger effect on long-term rates. Excerpts:

What are the major triggers for the debt markets going ahead

The biggest trigger for market would be reasonable improvement in fiscal deficit as it would reduce the supply of government bonds in the market and as a result lead to lower government security rates. In the short term, bond index-related flows can impact the markets. If India is included in the global bond index, we can see some money coming in, which can pull down the yields in the short term.

How do you see QE tapering impacting debt markets

When the actual tapering happens, we dont expect markets to react much. Most of the tapering concerns have been already priced in the asset classes globally. Domestic factors would have more say on the debt markets. If we are not able to control the fiscal deficit or bring down the inflation, we can see policy rates being raised again and long-term rates staying at elevated levels.

What are investors expecting from long-tenure debt instruments

Over the long term, we have managed to deliver returns of around 8% in most of our long-term debt products. This is what investors are expecting from government rates hovering between 8-8.5% and corporate papers yield close to 9-9.5%.

In recent months, with the volatility seen in debt markets, questions have been raised on Sebis coding system that marks debt funds as safe.

The coding is more to depict relative security which various asset classes offer. There has been certain volatility on the debt side. The returns for the year for several debt schemes could have been low, owing to the volatile conditions. But in the mark-to-market scenario, products are bound to react to market conditions. A year or two-year horizon debt schemes tend to deliver positive returns. So, the colour coding is perfectly fine as it is meant to indicate the medium-term relative risk-return profile of various asset classes.

Are you offering any new products to deal with this volatility As we are a long-term savings player, our products offer long-term financial solutions. Our clients look for long-term investments as per their risk-appetite and financial goals.

What are your expectations from the RBI

We think that RBI is more or less through with its rate hike cycle unless there is an external shock. The repo rate is already at 7.75%. The flattening of yield curve seems complete. However, if inflation numbers for December are higher than expected, the central bank may be forced to go for another 25 basis points hike.

Why have unit-linked insurance plans (ULIPs) lost their sheen When ULIPs were launched, we saw healthy returns from equities up until the 2008. However, given the fact that equity markets have not performed as well in the last five years, we have seen ULIPs losing some sheen. With increased focus on customer benefits and rationalization of charges, ULIPs today are a superior product category.