In the last financial year making money in debt funds has been simple, as it was apparent that interest rates had to decline. But debt funds managers face a challenge in 2015-16 and will need to be more dynamic and proactive, says Amandeep Chopra, head of fixed income at UTI Asset Management Company. In an interview with Chirag Madia, he says that, if things fall in place then a rate cut is a definite possibility in June. Excerpts.
What is your view on interest rates in the current scenario?
Our outlook on interest rates have not changed dramatically in the last month. At the start of the year we forecast rate cuts of 50 basis points. Now we are qualifying that view by saying that while there might be another 25 basis rate cut in the next few months which might take repo rates to 7.25%, there is broad expectations that we might see a rate cut in June as RBI will have a clearer picture on monsoons. However, another rate cut cycle will be largely data dependent. The RBI has maintained that future action will be based on key data points on the macro economy. We are reaching a stage where markets are not pricing in positive changes like low economic growth, an inflation trajectory lower than RBI’s forecasts and possibility of normal monsoons. In that background I think policy rates at 7% is likely by end of financial year 2015-16.
Where do you think the benchmark bond yield, currently close to 7.9%, will settle?
Benchmark bond yields are being driven by market expectations and spreads. The RBI has articulated that even with consumer price index (CPI) inflation at 5.8% -a spread of 150 basis points- they are comfortable and can bring policy rates to 7.25%. So going forward, if RBI cuts rates by only 25 basis points, this effectively means that they are looking at policy rates at around 7.25%. In that environment when there are no more expectations of rate cut and stable inflation, I think the 10-year government securities (G-Sec) can easily settle anywhere at 7.5-7.65% by end of the current financial year. But weak monsoons and/or negative trends in inflation, oil prices or the currency can widen this spread and keep the benchmark at anywhere between 7.75-8% band.
What are your expectations from the June monetary policy?
One expectations is that the RBI may revise both growth and inflation outlook lower than their current estimates. If the inflation target is revised lower, that will be a big positive trigger. If things fall in place then a rate cut is a definite possibility in June.
What is your biggest concern as as a debt fund manager?
My biggest concern is that if the current policy paralysis gets more widespread, that will be a big negative for India.
India’s weightage move to ‘neutral’ which can lead to significant reallocation of portfolio flows, putting both debt and equity markets at risk. Secondly, as a debt fund manager it has become increasingly challenging to confront systematic risks. The recent fall in equity, currency and bond market in sympathy with global events is a case in point. I think 2015-16 will be bigger challenge for debt funds managers than last year.
Given the current scenario, what strategy should investors adopt at this point of time?
We would advise retail investors to look at products that are moderate in duration and high on accruals like short-term income funds and credit opportunities funds. They might even possibly look at hybrid funds like monthly income plans (MIPs) as both the equity and bond markets have corrected significantly and offer a good entry point for longer term investors.
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