'Any normalisation exercise will bring its share of volatility.'
Fed policy action will have a bearing on risk assets and global liquidity, says Amit Tripathi, CIO-fixed income investments, Nippon India Mutual Fund.
In an interview with Samie Modak, Tripathi says given the possibility of near-term volatility, investors must choose products in sync with their investment horizons.
The 10-year government yields have risen sharply since May. Do you expect them to harden further?
The unexpected rise in headline CPI was the first trigger that unsettled the markets.
Three follow-up factors -- a faster recovery after the second Covid wave, continued stickiness in core CPI with continued upside risks, and an impending normalisation of a hugely accommodative monetary policy -- have ensured that benchmark yields hardened since then.
Normalisation seems to be around the corner which, along with proactive liquidity management by the RBI, will eventually move the shorter tenor rates higher over the next six-12 months.
While longer rates may also react somewhat in conjunction, the extent of adjustment may be considerably less given the steepness in the current yield curve and the improving fiscal position.
Core CPI stickiness is a risk to this view. We expect the 10-year benchmark to trade below 6.50 per cent through FY22.
What is your view on inflation? When do you see the RBI hiking interest rates and by how much?
Unless there is a sharp correction in global commodity prices, the core CPI can remain above 5 per cent in FY23, which will impede the move of headline CPI towards the eventual 4 per cent target.
Under the current RBI construct, the visibility on a sustainable growth trajectory is the primary driver for any normalisation, as long as headline inflation expectations remain anchored in the 5 per cent (plus or minus 50 basis points) range.
In such a scenario, we feel the RBI will embark on a path of slow normalisation, adjusting first the corridor and then the repo rates eventually taking the terminal rates to a range of 5.00 per cent-5.50 per cent over the next 18-24 months.
How will the policy normalisation by the US Fed play out in the domestic markets? How do you see the spread between India and US yields?
The US policy normalisation has implications across risk assets and also on global liquidity.
Having said that, domestic considerations, including the fiscal position and core CPI trends, will be more relevant for rate setting and market yields for our bond markets.
Spreads vis-a-vis US bonds are not very relevant, since domestic demand-supply considerations are key to both level and shape of the yield curve.
Is this a good time to invest in debt schemes?
Any normalisation exercise will bring its share of volatility. The steepness in the yield curve has value and gives protection against interim volatility, as long as the investor stays the course.
At this juncture, it's critical for investors to choose products in sync with their investment horizons.
Which debt schemes/categories are the most attractive at this juncture?
For investors who have a short-term horizon or are unsure of their holding periods, we would suggest a conservative stance for the next 3-6 months until there is more clarity on both direction and pace of normalisation.
In terms of categories, investors can look at ultra-short term and low-duration funds with a 6-12-month horizon.
For a two-three year holding period, short-term and corporate bonds funds are well placed, owing to the steepness in the yield curve.
Long-duration funds, while priced well, have to be considered only with a four-year-plus-kind of time frame.
With much-improved balance sheets and better macro and microenvironment unfolding, credit-risk funds do present an interesting proposition for investors who are comfortable with that risk profile.
Has risk aversion towards credit-risk funds declined? There are good opportunities in this space?
Corporate and financial balance sheets are in the best shape at the current juncture. Leverage across the system has been reduced. Asset quality issues have been broadly identified and addressed.
The approach towards capex remains conservative. And the macro and microenvironment is increasingly getting better from an activity and profitability perspective.
This kind of backdrop is conducive to increasing exposure in the credit space. The opportunity set was somewhat limited owing to a conservative approach towards borrowing by most corporates but the supply is getting better and more diversified as business confidence grows.
How has credit quality panned out since the pandemic?
India went through its credit challenges way before the pandemic struck. Hence the risks that played out post-pandemic were essentially related to short-term activity and cash flow disruptions and were not triggered by lop-sided balance sheets.
After the first wave, all well-managed entities have further fortified their balance sheets by improving their capital and liquidity position.
The cyclical upside, which started towards the end of last calendar year, has gathered pace and further improved prospects. Hence in hindsight, the corporate sector, in general, including financials, has performed well through the pandemic.
How have Sebi's recent changes impacted returns and investment strategies?
The main thrust of regulations in recent times has been on risk disclosures, valuations, and liquidity management in open-ended schemes. To that extent, these regulations have and will continue to provide more comfort to investors as they increase allocations to various debt MF products.
While returns at the margin do get affected due to changes in risk management and liquidity management practices, they ultimately ensure that investors don't get negative surprises vis-a-vis expectations.
Are debt products now safer in general?
Notwithstanding isolated episodes, debt schemes have done a reasonably good job in preserving capital and delivering above par returns across cycles over the last 15-20 years. The recent regulatory interventions further buffer the risk management practices and definitely make MF investments even more safe and attractive from an investor standpoint.
