Taper won’t impact markets much, but domestic factors will

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ICICI ICICI
SummaryThe biggest trigger for market would be reasonable improvement in fiscal deficit.

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 don’t 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 Sebi’s 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

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