Considering the demand-supply mismatch in the bond market, RBI should start issuing floating rate bonds (FRBs) , believes Amit Tripathi, President and CIO – Fixed Income, Nippon India Mutual Fund. He tells Christina Titus that FRBs are the best asset-liability management products that banks can own. Excerpts:
As the final GST reforms have been announced, what is the market inferring from it?
The revenue implication of Rs 48,000 crore turned out to be lower than the market expectation, which led to fall in yields. The small extrapolation from FY24 to FY26 will not be a worry for the market.
Further the tweaks in GST slabs will have a greater impact on inflation than earlier anticipated. GST on regular consumables and other items like packaged food, which have a meaningful weightage in the CPI basket, has been reduced to 5% from 18%. Therefore, the expected impact on headline inflation could be as high as 70-80 basis points compared to 40-60 bps estimated earlier. On GDP / aggregate demand, one can expect a net positive impact though there are many other moving parts there.
With the bond market grappling with weak demand-supply dynamics, how do you see this panning out?
The RBI has many things in its policy toolkit such as operation twist, OMOs, auction amount adjustments, and tenor adjustments in the borrowing calendar.
The takeaway from the June policy was that the announcements focused more on real economy rate transmission rather than managing small movements in 10-year bond yields. 6.25-6.50% is fair value, assuming no large variations in growth vis a vis RBI estimates.
But RBI will always be concerned about any unhinged movement in the 25-30 year bond yields due to its salutary impact on the entire curve. This will also have a large impact on SDL yields and demand. If we are going to see any steps in the near-term from the RBI, it may be in terms of the borrowing calendar tenor adjustments. As insurance and pension demand for longer duration bonds is not matching up with supply, RBI may reduce the longer bucket issuances in the second half.
Notwithstanding these short term concerns around demand supply, RBI should also start issuing floating rate bonds (FRB). FRBs are the best asset-liability management products that banks can own. They are also one of the best products suited for investors looking to invest in long term sovereign bonds, but don’t have too much appetite for price volatility. RBI used to issue floating rate bonds earlier, which they had to discontinue. We feel it’s time to restart issuances keeping the overall development of the market in mind.
FPI inflows into government bonds touched a five-month high in August. Do you think it will sustain?
The recent uptick in yields and widening of spreads led to incremental foreign inflows. Stable macro conditions, low inflation and relatively attractive yields, will keep the FPIs interested going forward.
How should investors adjust their debt portfolio in the current scenario?
We expect an incremental 25-50 bps cut in repo rates going forward, though the bar for the same is high. Even assuming no further rate cuts but only a prolonged pause, investors need to have majority allocation in 2 to 4 year AAA and AA bonds in their portfolio, which offer reasonable carry protection in the current low yield environment. Schemes such as low duration fund, and intermediate duration funds like short term bond fund, corporate bond fund and banking and PSU bond fund, invest a major part of their portfolios in 2 to 5 year maturity assets. Hence investors investing through debt mutual funds ideally should majorly allocate in these funds with an investment horizon of 9-12 months.
Given the stable macro set up, high real rates, and the recent price correction, any investor who has a time horizon of more than 12-18 months, should definitely have some reasonable allocation in long duration debt schemes. A 70-30 allocation between intermediate duration funds and long duration funds, could be considered.
Is it a good time to invest in gilt fund, considering rising yields?
The risk return is definitely more attractive to invest in gilt fund right now compared to six months ago. Industry has seen some incremental inflows into gilt fund in the last one month, indicating increased interest.