In an interview with Anjali Raulgaonkar from Capital Market Publishers, Akhil Mittal, Senior Fund Manager-Tata Mutual Fund, said, RBI's commitment towards bringing headline CPI closer to 4.0% on a durable basis and in a calibrated manner is positive for India bond market on a medium to long term basis.
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?
We believe that the sovereign bond yields in India have bottomed out and are going to trade range-bound for a foreseeable future. The first signal of yields bottoming out came from RBI in its December monetary policy, in which it maintained status quo on policy rates (against market expectation of 25bps to 50bps repo rate cut), called the negative impact of demonetization as transient and highlighted upside risks to inflation from firming up of crude prices, dollar strengthening and sticky core inflation. Further by changing stance from accommodative to Neutral in February policy, RBI signaled that the objective of achieving the medium term inflation target of 4% with-in a band of +/- 2% is paramount. RBI's commitment towards bringing headline CPI closer to 4.0% on a durable basis and in a calibrated manner is positive for India bond market on a medium to long term basis.
Bond market yields witnessed sharp volatility post demonetization announcement in November. The yield on 10-year Gsec benchmark fell from 6.70% levels in October end to lows of 6.20% levels and spiked up back to 6.75% levels on the day of February monetary policy after RBI downplayed the growth impact of demonetization, changed stance to Neutral and highlighted the importance of 4% inflation target. As market participants revise their expectations on future interest rates, bond market may witness some more volatility in near term. Our base case scenario is a range bound market for the year FY18. We expect 10-year Benchmark yield to trade between 6.70%-7.30% during the year. The surplus banking system liquidity is going to persist for next 6-8 months and will limit upside in bond yields.
Prudent policies of both Government and RBI reinforces the notion that Indian policymakers will not trade-off macroeconomic stability for growth. This signaling by policymakers will augur well for global funds allocation to Indian fixed income market. A stance change to Neutral doesn't necessarily mean end of easing cycle but it does raises the bar of further easing. Domestic Inflation trajectory will play a key role in determining future direction of bond yields. Indian bond market will also look for cues from movement in global bond yields and commodity prices.
2. How will you rate the Union Budget 2017-18?
Finance minister tried to establish a fine balance between fiscal consolidation and providing support to the economy by relaxing the fiscal deficit target to 3.2% from 3.0% as per the FRBM roadmap earlier. One of the key highlights of this year's budget was massive mobilization under the small savings schemes, which can be attributed to demonetization initiative. Net market borrowing after accounting for redemptions and buy-back stands at INR 3.48 trillion, marginally lower than INR3.65 trillion in FY2017. Budget was overall Neutral for the bond markets but lower net borrowing number and proposed buy-backs will present opportunity in the short-end of the curve.
3. How do you perceive the government's demonetization move? What are negative and positive implications?
Demonetization was a historic move. It was aimed to tackle problems of fake currency, shrink the size of the parallel economy and black money in India and reduce corruption. It had its near term negative effects on the growth of the economy as it impacted the consumer spending. Demand shock due to demonetization also resulted in sharp fall in inflation as it brought discretionary spending to a virtual halt. Sectors like realty, consumer durables and jewellery were most impacted and economy might take 1-2 quarters to come out of the shock.
But we feel that long term positives of demonetization exercise far outweigh the short term pain. Demonetization has succeeded in bringing more and more people in to the formal economy and this will play out well for government's tax collections going forward. The continued push towards digital transactions will increase formalization in the economy, boost transparency and reduce corruption.
4. 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 is close to 2 years currently (has been in range of 2 years to 3 years in past) and given the current position in monetary policy cycle, we are cautious on duration. Especially at shorter end of the curve, we believe the risk adjusted return endeavour is more realisable.
5. Kindly share your views on recent inflation movement? Where will the inflation curve move in near term? Why?
CPI inflation moved down to a new low in Jan 2017 at 3.17% y-o-y vs 3.4% in previous month and lower than market expectation of 3.3% led by lower food and fuel inflation. Exceptional vegetable disinflation continues to suppress headline inflation. CPI ex vegetables is at 4.5% y-o-y. Core inflation increased to 5.08% y-o-y vs 4.91% in previous month, but mostly on account of higher prices of transportation fuels. Core Core inflation (Core inflation - transport fuel inflation) remained flat at 4.7% y-o-y. January inflation print marks a low and subsequent inflation prints are expected to be higher given the waning-off of base effect and bottoming out of exceptionally low vegetable inflation. Given firm crude prices and rising commodity prices, we expect inflation to go up to 4%-4.50% in H1FY18 and further move up towards 5% in H2FY18.
6. 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
7. 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
8. If the interest rates fall further what will be your strategy for debt funds?
Given the current position we are in the monetary policy cycle, and the future target of CPI inflation, we believe further easing by RBI would be difficult, and contingent to many variables. As RBI has already changed stance to neutral, the chance of rates coming down in a secular manner looks distant. 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 further steepening 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.
9. 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