Bias for interest rates is on the upside, says UTI MF's Amandeep Chopra

As the markets adjust to the process of policy normalization, investors can focus on products which are running strategies to capture these trends with a low level of volatility, said Amandeep Chopra

The inflation trajectory for India into FY23 is likely to see some decline from the highs we see in Q4FY22, says Amandeep Chopra, group president & head – Fixed Income, UTI MF. In an interview with Ashley Coutinho, he says the guidance from RBI in managing the large supply of bonds as it embarks on policy normalization will be critical. Edited excerpts:

The RBI’s Monetary Policy Committee kept key interest rates unchanged on February 10 and retained the accommodative stance. Your thoughts on the same.

The policy was extremely dovish by maintaining a status quo on rates, policy stance and guidance. RBI has made it very clear that they do not see conditions warranting a change in any of the rates as they take comfort from a declining inflation trajectory (to 4.5 per cent) for FY23 while domestic economic recovery is still incomplete and needs continued policy support. Furthermore, any policy actions would be “calibrated and well telegraphed” so as to be non-disruptive.

What do you make of the recent Budget?

The Budget for FY23 continues with the theme of social welfare, rural sector and infrastructure with continuation of several micro-initiatives. This time there is a lot more emphasis on technology than before. Financial support for a digital ecosystem for the financial sector, education, inclusion and for ease of business, among others, makes the objective of preparing for a technology-led future quite clear.

Among the positives are the reasonable revenue estimates with a likely upside given the low nominal GDP growth assumed and lower reliance on non-tax revenues. Secondly, expenditure growth has been moderate without any populist programmes and a higher share of capital expenditure. Finally, the taxation structure has remained stable.

What led to the surge in bond yields?  

The higher projected fiscal deficit number for FY23 at 6.4 per cent leading to a gross supply of Rs 14.95 trillion was one factor. This is the highest supply of sovereign bonds the markets have seen in an environment of large demand gap, a gap which was filled in by RBI in the FY22. The other disappointment was that there were no amendments to the tax laws for Indian bonds to be included in the global indices. This was expected to create a demand of $10 billion to $30 billion.

Going forward, the LIC IPO and index inclusion could help in addressing the concerns of the market on the deficit funding. The guidance from RBI in managing the large supply of bonds as it embarks on normalization of its monetary policy to pre-pandemic levels will also be critical.

Will we see a spike in inflation the way some developed economies are experiencing right now?

The inflation trajectory for India into FY23 is likely to see some decline from the highs we see in Q4FY22. Global inflation – food, commodities, oil, and consumer products – are still expected to remain elevated. Some of the input price pressures and pass-through of crude oil increase into retail fuel prices in the backdrop of normalizing growth are upside risks to inflation trajectory.

What is your view on the trajectory of interest rates in India and globally?

Given the backdrop explained earlier, the bias for interest rates is on the upside.

What are the kinds of debt products that investors should look at right now?

As the markets adjust to the process of policy normalization, investors can focus on products which are running strategies to capture these trends with a low level of volatility. Asset allocation in a combination of debt products and keeping the investment horizon aligned with the fund maturity is important.

Investors can consider up to two year duration buckets such as money market, Ultra Short term, Low Duration, Short Term Income Fund, Corporate Bond as these funds will be well suited for those who are looking for low volatility.

Credit risk funds as a category have given returns of 9 per cent for a one year period. Is it a good time for investors to look at these funds?

Credit risk funds remain an attractive option for investors with a 3-5-year investment horizon as an improving economic cycle and liquidity support may reduce credit risk concerns especially in higher quality names. One must look at Credit risk funds as a part of your overall debt fund allocation and not in isolation.