Even though domestic factors remain stable, the spillover from global developments poses a challenge and will be closely watched, says Mahendra Jajoo, CIO, fixed income, Mirae Asset Investment Managers. In an interview with Ashley Coutinho, he says the retention of inflation expectations shows the Monetary Policy Committee’s confidence in domestic stability and progression. Edited excerpts:
What do you make of the policy decisions taken by the RBI?
The Monetary Policy Committee’s (MPC’s) decision to hike rates by 50 basis points was in line with market consensus. Even though domestic factors remain stable, the spillover from global developments poses a challenge and will be closely watched. The retention of inflation expectations shows the MPC’s confidence in domestic stability and progression. So, the upkeep of a calibrated stance can be expected from the committee in future as well.
The US Treasury yield curve inversion has continued to deepen. What do you make of this and what is the impact?
In a typical scenario, yield curve inversion points to a recession. With two back-to-back quarters of negative GDP growth, the US is already in technical recession. However, a strong job market, healthy consumer spending and sticky inflation has given enough reason for the Fed to keep the rate hikes going. While the lagging indicators continue to point towards a strong economy, the leading indicators indicate otherwise: The PMIs have slowed down starting June, the mortgage index which reflects housing market conditions in the US has been decelerating since July and consumer confidence is fading.
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What is your take on inflation, both global and India? Are we relatively in a better position than some of the Western countries?
It is reasonably clear that for now the Western world’s inflation problem is much more severe than ours. This could also be attributed to composition of the inflation basket, wherein our basket outweighs food items, whereas the Western world has higher allocation to energy and consumer durable and services, which are indirectly derivative of commodity items. India’s inflation target is 4-6%, our inflation is at about 7%, the gap is of about 100 bps. For Western countries, the inflation target is 2% whereas their inflation is running at 8-10% (much higher than India’s). The gap that the Western world has to cover ranges between 6-8%. The numbers in themselves reflect the position and the strengths of the economies.
What is your view on the trajectory of interest rates in India and globally?
Whether it is India or elsewhere, the yield curve itself displays the trajectory of interest rates. Aggressive rate hikes are expected in the near term to tackle inflation. In the longer run, as the lag effect of recent hikes works its way through the broader economy and growth concerns strengthen, central banks may recalibrate the pace of rate hikes.
India may become a part of global bond indices next year. How will it impact us?
India’s inclusion in bond indices is looking more likely as a result of Russia’s exclusion. But, there are still a lot of operational challenges such as operational hours, settlements, taxation and depth of debt markets, which need to be addressed before getting a sizeable share. China, which got listed in 2016, only gained traction in 2020-2021, after altering and developing policies. Similarly, for India, it might be a start but it may be long before it benefits from the listing.
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What are the kinds of debt products that investors should look at right now?
Investors should consider their respective risk profiles. Generally, for the overall market purpose, considering the yield curve has turned much flatter now and there could be enhanced volatility in the short term, 3-, 5-, and 10-year target maturity index funds with high-quality portfolio, like that of Central government securities, SDL or AAA PSUs, depending on the investment horizon and risk profile, seem appropriate for the current environment.
Do you see more corporates lining up to raise funds from the bond market this year, given the expected revival in capex cycle?
Credit pick-up has been strong this year so far. Corporates seem to be opting for bank funding more than capital market borrowing at present, given somewhat subdued demand from participants there. Private sector capex is showing early signs of picking up. If the current tightening phase continues, then at some stage, credit pick-up is expected to accelerate.
