In an conversation with Chirag Madia, he said everyone will be keenly watching Brexit and Federal Policy in US. If Britain exits European Union and there is hike in interest rates in the US, there will be huge volatility in the bond markets
Dwijendra Srivastava, CIO-fixed income at Sundaram Mutual, believes that next policy from the RBI will be a status-quo. In an conversation with Chirag Madia, he said everyone will be keenly watching Brexit and Federal Policy in US. If Britain exits European Union and there is hike in interest rates in the US, there will be huge volatility in the bond markets. Excerpts:
What are your expectations from the forthcoming monetary policy?
I don’t think we should expect any rate cuts in the coming policy. I believe it will be a status-quo, but Dr Raghuram Rajan might give RBI leanings on monsoon and its impact on the Indian economy. Broadly, there is a consensus among weather forecasters that El Nino is fading and La Nina will strengthen. If that happens, agriculture inflation over a period may come down. Having said that, with strong monsoons, there might be pick-up in demand, consumption will also go up and if oil prices continue to spike, inflation will not go down as expected by many investors. From the international point of view, everyone will be keenly watching Brexit and Federal Policy in US. If Britain exits European Union and there is hike in interest rates in the US, there will be huge volatility in the bond markets. So given all these issues, I don’t think Dr Rajan will lower the rates in the next policy.
Given the current scenario, where do you look 10-year benchmark yield settling down and where do you see interest rates heading?
Currently, repo rate is around 6.5% and 10-year yields is at 7.48%. In a stable scenario, we should expect a spread of 70 to 100 basis points (100 basis points =1%) between repo rates and 10 year. But in case people starts expecting rate rise, the spreads will widen and market might move ahead of actual move and spreads between repo and 10 year could be 125 basis points. However, this scenario doesn’t exist as of now. I believe 10-year yield will hover around 7.5% by the end of current calendar year. But if monsoons are good and agriculture inflation doesn’t shoot up, we might see yields going down to 7.25% also. For interest rates, there could be another 25 basis point rate cut, but rates will not head up.
In the last few months, we have seen many downgrades in corporate sector. Given the state, how do you manage risks?
Almost every product from our fund house is top rated and we don’t venture too much into credit risks. We are not taking undue risks because we anticipated current state of banking since last few years and restricted ourselves to high quality portfolios. For a corporate apart from the normal quantitative aspects we look at the qualitative aspects like corporate governance, weathering of economic cycles, management background, etc. As a fund house, we have also segregated credit function from fund management function. So for us, our credit function doesn’t report to fund manager but instead it reports to risks management reducing conflict of interests.
What according to you are key concerns as a fixed income fund manager?
For mutual funds, I think lot of money has flown into liquid funds in the last few years, and the nature of funds being short term, once the economy picks up, corporate and banks which are major owners of liquid funds will redeem money and that is one of the risks which the industry faces. Secondly, for any fixed income MF investor, inflation has always played an important role and for a fund manager stable to declining inflation gives a lot of comfort. But given the situation, we believe inflation will be volatile which can be point of concern.
What is your advice to investors who wants to invest in fixed income funds?
As an investor with possible paucity of tax-free bonds this year, he can look at schemes which can offer better tax adjusted returns on longer duration. For longer duration fixed income schemes, investors with longer investment horizon can look to invest in a systematic way. If your risk appetite is low, you may go in for liquid and ultra short term schemes with an investment horizon up to a month and finally with a moderate risk appetite and an investment horizon up to a year can look at short term,medium-term bond funds, or even a dynamic bond fund.