The RBI is likely to hold key interest rates on April 1 and may not opt for rate cuts till CPI inflation falls significantly faster than RBI?s base case, believes Sudhir Agrawal, fund manager (debt), UTI MF. In an interview with Ashley Coutinho, Agrawal advises investors to focus on the asset allocation approach while investing their money. Excerpts:
Fund managers have been expecting interest rates to decline for quite some time now. How do you read the trajectory of interest rates in the coming months?
Though the headline inflation has come off recently, most of this fall has taken place due to the sharp fall in vegetable prices. The core CPI still remains sticky at around 8%. Since we do not expect CPI to fall further from the current levels in the next few months, we may see rates on a pause for the rest of this year.
What are your expectations from RBI?s policy guidance on April 1?
As per RBI’s baseline projections, CPI is expected to range between 7.50% and 8.50% by the end of this year. The fall in inflation has been in line with the RBI’s gliding path set out in its last policy review. Till the time we see CPI falling significantly faster than RBI’s base case, we may not see any rate cuts. Hence, we expect RBI to be on pause in its next policy on April 1.
Debt fund managers faced a tough time between July and September last year due to RBI?s unexpected actions? What are the lessons that you, as a fund house, have taken home from this?
Just two months before the MSF hike by RBI, we had a very favourable momentum in debt markets, driven by a sharp fall in WPI. The market was expecting the RBI to cut rates even further. After the sudden MSF hike in July, traders were caught on the wrong side due to aggressive duration bets across the portfolios.
However, we have suffered the least during this hike as we were not very comfortable going against the fundamentals just to capture the trading momentum. Hence, we had cut the duration aggressively prior to the event itself. This has reinforced our view that an aggressive trading position should never be taken to ride the momentum at a time when fundamentals do not justify it.
Do you see rupee strengthening going forward?
The rupee’s performance depends a lot on election results. If we see a strong and stable government after elections, the rupee may strengthen further from here. However, a lack of clear majority to any party may put some pressure on the rupee going forward.
Which debt products do you expect to do well in the coming weeks?
We expect the yield curve to steepen in April due to expectations of improvement in the liquidity situation, which may lead to a fall in short-term interest rates. Hence, it is advisable to invest at current high rates in ultra short-term funds and short-term income funds, which may perform well once the yields start falling, resulting in a rise in the prices of short-term papers.
What is your advice to investors at this point in time? What are the key factors that a retail investor should keep in mind while investing in a debt fund?
Investors should focus on the asset allocation approach while investing their money and should not get carried away by investing everything in what has performed best in recent history. Any investment should be looked at from a portfolio perspective.
Debt investment forms an integral part of the portfolio as it provides stability to the portfolio. While investing in debt funds, investors should first set aside a portion of their portfolio in liquid funds or ultra short-term funds to meet their liquidity requirements. They can then look at short-term income funds, income funds and FMPs to generate steady income over a alonger period.
