In an interview with Anjali Raulgaonkar from Capital Market Publishers, Akhil Mittal, Senior Fund Manager, Tata Mutual Fundsaid, With FY17 CPI inflation target of 5% having even probability of getting achieved, we believe that there is some space for easing with RBI and expect a 25 bps cut. However, any action beyond that will be purely data dependent.
Mr. Akhil Mittal
1.What are your views on fixed income market? How have the yields moved and which direction you see them moving in near to mid-term and why? What will the key driving factors for yields?
Since beginning of 2015, RBI continued its accommodative stance, with cumulative rate cuts totalling 150bps. This was made possible by the CPI Inflation coming off despite a second successive year of deficient monsoon, largely aided by plunging crude prices and high base effect. The macroeconomic scenario was a mixed bag with inflation, CAD and reserves doing well but still reasonable slack in the economic activity although the GDP still ticked the world's highest at 7.6%.
The sovereign bond yields remained volatile during the last 6 months. The 10-year benchmark yield which had touched a low of 7.5% in October 2015, when the RBI cut its policy rates by 50 bps from 7.25% to 6.75% taking comfort from the falling inflation, moved up during the subsequent months, mainly due to global factors. The US Dollar rally induced by the divergent monetary policy and the concerns of Chinese slow down led to Rupee coming under pressure, as the FIIs turned net sellers. Added to this, the concerns on the Government's intent to stick to the fiscal consolidation path resulted in 10-year benchmark yield touching a high of 7.88% during the month of Feb-16. However, since the month of March, the sentiments improved as both the domestic and external factors turned favorable. The big positive for the bond yields came from the budget, when the Government decided to opt for macro stability and stuck to the earlier agreed deficit reduction plan (3.5% for FY17 vs 3.9% for FY16). Another key positive for the fixed income market was moderating inflation situation. Added to all these macro factors, RBI changed the liquidity stance from deficit mode to neutral mode. All these factors resulted in massive rally in fixed income market and sharp fall in yields across the yield curve. 10 yr G-sec yield fell to 6.95% as on 27th Sept and we also witnessed similar fall in corporate bond yields.
Going ahead, we believe that monetary policy continues to look at easing space from fall in retail inflation, while keeping other factors at back of mind. With FY17 CPI inflation target of 5% having even probability of getting achieved, we believe that there is some space for easing with RBI and expect a 25 bps cut. However, any action beyond that will be purely data dependent. We expect 10 yr G-sec to trade in range of 6.75% - 7% in near term and settling around 6.65% - 6.90% by end of financial year.
2. What is your strategy for short term funds? What is your exposure to long term funds and why?
Tata Short Term bond fund aims to generate regular accruals through investments in high credit quality debt and generate capital gains from fall in interest rates. The average maturity of the fund has been in range of 2 years to 3 years in recent past and given the easing monetary policy cycle and current position therein, we are currently cautiously bullish on duration. Especially at shorter end of the curve, we believe the risk adjusted return endeavour is more realisable.
3.Kindly share your views on recent inflation movement? Where will the inflation curve move in near term? Why?
India headline inflation surprised on the downside in August 2016 at 5.05% vs 6.1% in July. The decline was driven by a combination of lower food prices and favorable base effects. Food price inflation fell sharply to 5.9% y-o-y from a 23-month high of 8.4% in July, led by a sharp fall in prices of vegetables (-3.7%), pulses (-1.0%) and meat & fish (-1.3%). Meanwhile, core CPI moved up marginally to 4.7%, from 4.6% in July. We expect the headline CPI inflation to moderate to below 5% in coming months owing to base effects, but we expect it to revert back towards the RBI's target of 5% by March 2017.
However, potential increase in house rent allowances and GST implementation could push headline inflation above the RBI's 4%+/-2% target in 2017.
4.What's your investment strategy?
We follow a philosophy of SLR in managing our Fixed Income Portfolio's where S for Safety, L for Liquidity and R for Returns is the guiding principle. We maintain high credit quality in our portfolios and do not go down the credit curve. This ensures safety of capital of investors. While allocating the portfolio, we maintain ample liquidity to ensure swift change is possible in case of change of stance / events. Returns are envisaged to be generated in line with objectives of the scheme and risk is contained in the process
5.How often do you re-balance your debt allocation?
We keep a close watch on markets and our portfolios. In case any event / occurrence in the market requires a change in stance, or any developments wherein our views have changed, we rebalance our debt allocation on real time basis. This is a continuous process and not dependent on period / pre-specified date.
However, we have formal process of discussions / market update and forming a view on markets. We do this through Investments Committee meeting / Debt Investment Committee meeting, which happens periodically
6.If the interest rates fall further what will be your strategy for debt funds?
Given the current position we are in the monetary policy easing cycle, and the future target of CPI inflation, we believe RBI has some space for easing but contingent to many variables. As we go accomplishing the CPI targets and hence easing, we will reach a point where further fall in inflation will be difficult. There, we expect RBI to change stance to neutral and we expect market to start contemplating for an eventual end to easing cycle. This would mean building in a term premium for longer duration, which will result in furthersteepening of yield curve.
In line with our view on markets, if interest rates fall earlier than expected / or steeper than expected, we would be looking to reduce interest rate risk (after having generated capital gains) by reducing duration
7.What is your advice to the investors?
We would ask investors to stay invested for a longer time period and choose product category depending upon their risk appetite. If one has greater appetite for risk and longer holding horizon, long duration funds could be considered, whereas for investors with shorter investment horizon and / or lower risk appetite, short duration funds could be considered
8. Has the inflation started to rise again? What will be the RBI's move in coming policy amidst rising CPI?
The recent headline inflation reading has surprised a bit on the downside. Large part of this fall can be attributed to food price decrease. Food prices especially the perishables, are highly volatile and persistence still needs to be ascertained. Meanwhile, core CPI moved up marginally to 4.7%, from 4.6% in July. Going ahead, movement in pulses prices and any increase in crude prices are likely to impinge on inflation in the economy. Stickiness in the underlying gauge of inflation limits the scope of any sharp downside movement in inflation.
On the policy front, RBI has indicated that it would look through the purely statistical element of movement in inflation, we still believe that benign core inflation provides some space for easing. Hence, given the recent readings, and evolving price dynamics, we do not rule out a rate cut in October policy meet. However, any policy move beyond 25 bps will be purely data dependent.
9. Foreign investors are shying from Indian markets. How do you explain it even after Prime Minister Narendra Modi's 29 February budget sparked a rally in bonds and the rupee?
Foreign investors generally follow the broader capital flow in risk-on / risk-off moves. India's macro situation has been stabilizing and standing out within other EM peers over last 2 years. Thus, India has attracted lots of capital flows in last year or so. In recent times, the global volatility has increased and factors affecting capital flows have become more volatile.But even in this current scenario, India still continues to remain attractive, albeit temporary pause in inflows.