India’s ratings upgrade by Moody’s, which has been done after a gap of 13 years, is a big positive for the nation’s debt markets as well, and will make debt mutual funds an exciting buying opportunity once again. “Improvement in credit ratings is also a very positive development for the debt markets. Here again the markets will benefit from more inflows from pension and other funds. More inflows will lead to bond prices moving higher and softening of yields. Ability of the government and corporates to raise money abroad will also help in reducing bond yields,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Based on the above trends, “we can safely say that debt mutual funds will again come back in favour. Returns which had become tepid last year are likely to again inch towards double digit. Hence we believe that debt funds once again offer an exciting buying opportunity,” he adds.
Jitendra P S Solanki, MCSI, CTEP, CFP and Financial Planner for Special Needs Dependent Families, says, “For mutual funds, this change in rating should give some respite to long-term debt investors where the 10-year yield has seen a sharp rise. We were seeing lower returns from this category, which should improve now. The 10-year yield has already fallen by 10-11 basis point. For other categories of debt funds, the investment outlook will not change much and investors should expect good returns from them.”
It may be noted that Moody’s decision to upgrade India’s ratings is underpinned by its expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term.
Key elements of the reform program include the Goods and Services Tax (GST) which will, among other things, promote productivity by removing barriers to interstate trade; improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetization, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy.
Moody’s expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018. However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018, with similarly robust levels of growth from FY2019 onward. Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns.