Despite debt giving low returns in the past few years, Sankaran Naren, CIO, ICICI Prudential Mutual Fund, believes that investors should not ignore future potential opportunities that exist in debt funds today. Naren tells FE’s Joydeep Ghosh that longer-term debt investors can look at duration and credit risk schemes. Excerpt:
You have been a strong advocate of debt funds in recent times. What are your reasons?
Fixed income appears very attractive, given the higher yields owing to high inflation and rising interest rates. Over the past 13 years, due to quantitative easing by the global central banks, corporate India could easily borrow at very low rates (close to zero) globally. Today, that is no longer the case given that banks have moved on to quantitative tightening and rates have risen. This would translate to corporates borrowing more domestically which is another reason debt becomes interesting. Investors shouldn’t disregard the future potential opportunities that exist in debt funds today because of the low returns that debt funds have delivered over past few years.
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How do you see the interest rate scenario panning out in India? Which tenure products will benefit the most?
As inflation continues to linger outside the RBI’s target range, we anticipate a rate hike in the upcoming policy. Currently, the shorter end of the curve (one- to two-year portion) seems fairly priced as this is one segment which has priced in an additional 25 basis point rate increase. Over the past few months, we have seen a significant improvement in yields. Given that short-term rates are likely to remain high due to restricted liquidity, categories like liquid, ultra-short and short-duration debt funds are our favoured recommendations for investors in this evolving scenario. For longer-term debt allocation, one can consider categories like the dynamic bond and credit risk.
At this stage of the economic cycle, we do not anticipate any interest rate reductions from the RBI. In contrast to earlier times when the RBI’s monetary policy operations were concentrated on 4% inflation, the RBI is now happy with inflation around 6%. At the repo rate of 6.5% and an average inflation rate of 6%, an extra 25 basis point rate increase would not be prohibitive enough to impede the economy. In fact, the economy will keep growing because overall monetary policy is favourable to expansion. We, therefore, think investing in the long end of the curve may not be beneficial because the RBI is unlikely to decrease rates anytime soon.
Do you think the Indian stock market, given the high valuation, is still attractive? Or do you see a correction in the coming days, more in-line with what has happened globally?
While India remains one of the most expensive markets globally, it is one of the structurally sound marketplaces that offer a secular growth story that is unique among emerging and developed economies. We believe macro investing will be crucial over the coming decade, making categories like business cycle funds beneficial. The US and Europe are on the quantitative tightening path and Japan, too, has initiated steps in the form of modified yield curve control strategy. We believe, rather than inflation, growth may become a problem in the coming year. Our big call for 2023 is multi-asset investing and our long-term structural call remains asset allocation. Within market capitalisation, we prefer large cap, flexi cap over mid and small caps.
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There is a strong decoupling theory that is being propagated that this time India’s higher growth rate will provide it with a cushion compared to recessionary trends all over the world. Do you think that this is possible?
We believe India is very much coupled with the global economies. In case of a recession globally, India stands to gain as it may aid in overcoming some of our present day challenges in the form of lower current account deficit and reduced oil prices.
Which are the sectors that are expected to do well in the next one-three-year perspective?
We are positive on manufacturing, healthcare, auto and financial services. From a 12- to 18-month perspective, we believe systematic investing in export-oriented themes like IT and pharma could deliver returns as recession fears would have abated by then.