In an interview with Anjali Raulgaonkar from Capital Market Publishers, Murthy Nagarajan, Head-Fixed Income, Quantum AMC said, It is a global phenomenon and domestic investors are buying into the growth story of India. We are seeing buying from FII again in the debt market due to attractive spread and stable currency.
Mr. Murthy Nagarajan
- 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?
Government bond yields have moved down after the British Exit from the European Union. Global bond yields have fallen by 30 to 40 basis points after the Brexit event. US ten year yields is now trading at 1.38% levels compared with 1.70% levels, the 30 year is trading at 2.09% vs 2.45% levels before the Brexit event. Globally, 12 trillion of developed market bonds are trading at negative yields, signifying deflationary conditions in the developed markets. Countries like Japan, Germany, Switzerland has 10 year yields trading in negative territory.
Indian bonds yield has also fallen by 10 basis points as the rate hike expectation by the Federal Reserve has been postponed to next year. The Indian rupee which has touched a low of Rs 68.20 against the dollar is now trading at Rs 67.10. The ten-year bond yields are expected to go down to 7% levels from the 7.25% prevailing as of today. The Indian monsoon is expected to be 106 % of the 10-year average which should dose food inflation. Pulses which has displayed 40 to 50% increase in prices on a year on year basis is expected to moderate in the coming months. The total production of pulses is expected to be around 20 million tons against 17 million tons of last year. The government has already initiated imports of pulses from Myanmar and Mozambique to increase supply of pulses in the domestic markets. With monsoon being normal, food inflation is expected to moderate in the coming months, which should allow RBI to achieve its CPI inflation target of 5 % in the current financial year.
With Raghuram Rajan resigning from 04 September 2016, the new RBI governor contenders are expected to be less hawkish. Real interest rates which are the difference between one-year T- bills expected CPI inflation in one year which was to be around 150 to 200 basis should move towards 100 basis points with the appointment of the new governor. This should create room for RBI to cut interest rates by 50 basis points. RBI has also re-iterated its commitment to keep liquidity in neutral zone which will induce RBI to do Open Market Purchase of Government Securities to increase liquidity in the system. RBI has to provide more liquidity due to redemption of 20 billion of FCNR B deposits and 6 billion of oil payment to IRAN. All these should bring the ten year closer to 7% levels, 100 basis points over the expected Repo rates of 6% levels.
2. What is your strategy for short term funds? What is your exposure to long term funds and why?
We are running a maturity of 13 to 14 years in our Quantum Dynamic Bond Fund as we expect easy liquidity and cut in repo rates in the coming months.
3. Kindly share your views on recent inflation movement? Where will the inflation curve move in near term? Why?
Inflation will move towards 5 % levels as food inflation will come down due to good monsoon.
4. What's your investment strategy?
Invest only in G sec and AAA PSU bonds as the corporate bonds spread are not favorable.
5. How often do you re-balance your debt allocation?
Depends on the spread between corporate bonds and G sec and the shape of the yield curve.
6. If the interest rates fall further what will be your strategy for debt funds?
We may reduce our maturity by taking profits.
7. What is your advice to the investors?
Invest in Dynamic or short term bond funds as interest rates are expect to be stable in the medium term
8. Has the inflation started to rise again? What will be the RBI's move in coming policy amidst rising CPI?
We expect CPI inflation to come down due to good monsoon, we expect RBI to sit pat on rates in the August policy.
9. When and How do you see rural consumption recovering?
With good monsoon and implementation of 7th pay commission rural consumption is expect to pick up from next calendar year onwards.
10. 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?
It is a global phenomenon and domestic investors are buying into the growth story of India. We are seeing buying from FII again in the debt market due to attractive spread and stable currency. FII have purchased around 1 billion USD of Indian debt in the last 10 days.