Going forward there will not be any aggressive rate cuts by the Reserve Bank of India (RBI), which will continue to maintain its ‘accommodative stance’ as mentioned in the policy, says Amandeep Chopra-head of fixed income at UTI Asset Management Company (AMC).
Going forward there will not be any aggressive rate cuts by the Reserve Bank of India (RBI), which will continue to maintain its ‘accommodative stance’ as mentioned in the policy, says Amandeep Chopra-head of fixed income at UTI Asset Management Company (AMC). In an interview with Chirag Madia, he also says that currently the company is recommending investors products like ultra short-term funds and short-term income funds. Excerpts:
What is your outlook on debt market?
When we started the current calendar year, we had three key worries. One was the hike in interest rates in the US, slowdown in China, and peripheral issues like Brexit and oil prices. While there were no rate hikes by the Federal Reserve (Fed) as envisaged, the concern will remain with us throughout the year. On China, people thought that the economy is stabilising, but again concerns are being raised and we need to keep an eye on further development. On local factors, we were worried about inflation, monsoons and fiscal deficit. Fiscal deficit trajectory in the Budget was a pleasant surprise, the monsoon started with a positive trend, but again with some delays questions are being raised on its impact on the economy. On inflation, we still have some concerns as it is not only tough to forecast inflation with accuracy, but we found it tough to assume a sustained benign inflationary trend in India. So, given all these parameters, our investment strategy was in the neutral or risk-off zone for the past few months. Even going forward, we are not looking at aggressive rate cuts by the Reserve Bank of India (RBI). But we believe RBI will continue to maintain its ‘accomodative stance’ as mentioned in its policy. We expect debt markets to be range bound in the near term, but we don’t see any major reasons or fundamentals triggers for them to rally. We have to wait and watch some of the events in the coming months from both domestic and international fronts.
Where do you look 10-year benchmark yield settling down and where do you see interest rates heading?
For interest rates, we believe it will remain range-bound in the near term. There is a small chance that RBI might go for a small cut (25 basis points) once the monsoon rains are sufficient and food inflation cools off. But even that rate cut would be just for the markets to rally as they would have already discounted that rate cut. Post that rate cut, our view would be very hawkish. For 10-year benchmark yields, we see a lot of volatility with upward bias. In such times, it is very tough to give a specific target, but we feel that it might move upwards to 7.6%. In case of a rate cut, it could go down to 7.30%, but that’s the best case and not below it.
What is your investment strategy at present?
Since past few months, we did not have a positive view on the direction of inflation and that is the reason we are playing it little safe. For long-term funds, we are neutral on duration as we are not very bullish on rates coming off meaningfully. On the contrary, we feel there are more chances of rates going up. In the short term space, there are some chances to make some money with bull-steepening and we are telling investors to focus on this particular segment as accruals are attractive, given the expected volatility.
What are the key concerns as a fixed income debt fund manager?
Primarily, I think a lot of market participants are not fully acknowledging the risk of higher inflation, specially food inflation, which is beyond even the government’s control. Similarly, the markets are not factoring in the surge in commodities prices, as globally we have seen an uptick in the commodity cycle — be it sugar, metal, oil or even pulses. Apart from these, we are yet to fully discount the impact of the Seventh Pay Commission and its impact on inflation. Finally, people are underestimating the consumption boom from chasing higher economic growth which can be fairly inflationary. For the international markets we are yet to fully understand of how much more central banks will ease and how easy liquidity and negative rates will create more asset bubble and take valuations to higher levels. That is another big concern from the larger macro perspective.
What kind of investment strategy should investors adopt now?
Given the state of the economy and our outlook on debt markets, we are recommending investors products that are at the shorter end of the spectrum, like ultra short-term funds and short-term income funds. We would also ask investors to look at well managed credit or income opportunities funds at this point of time. The basic premise for investing in such funds is that all the concerns about this category has been addressed by regulatory intervention as also by prudent credit selection and portfolio construction by design.