Market risk is temporary, credit risk permanent, says Mirae's Jajoo

RBI announced a series of confidence boosting measures, including commitment to conduct adequate OMOs, introducing for the first time, OMOs of state development loans, and online LTROs

Policy rates may be kept low for the foreseeable future, with frequent interventions by way of liquidity injection and market operations, says MAHENDRA KUMAR JAJOO, chief investment officer-fixed income, Mirae Asset Management India. In conversation with Ashley Coutinho, he says the focus on credit-related complications is symptomatic of a recency bias amid the Covid-19 pandemic. Edited excerpts:  

What do you make of the policy decisions taken by the Reserve Bank of India (RBI) last week?

The RBI announced a series of confidence-building measures, including commitment to conduct adequate open market operations (OMOs), OMOs of state development loans, and online long-term repo operations. More importantly, it provided long-term guidance to maintain the current accommodative stance for the next three quarters. At a time when market participants were struggling with concerns over rising inflation and large government borrowings, such an assuring policy statement would help bring stability, confidence, and renewed enthusiasm in the debt markets. The market now has one less worry on outlook, given the strong intent and demonstrated action by the RBI in the current environment.

Are debt funds out of the woods yet?

There were a few isolated issues and instances in recent times centred largely around aggressive credit investments. With interest rates having eased to historic lows, debt funds have done rather well. As for aggressive credits, they will always be prone to corresponding consequences sooner or later. Today, there is more attention on credit-related complications due to Covid-related stress and moratorium, which is a typical recency bias. Much of the damage due to credit had been in play, right from the default by the Infrastructure Leasing & Financial Services (IL&FS). Our core philosophy hinges on market risk being temporary, and credit risk permanent. We try to stick largely to high credit quality portfolios. Depending on how the economic situation evolves, issues related to aggressive credit will always be relevant to debt investors.

What is your outlook on the debt market?

While rising inflation and widening fiscal deficit remain a worry, the economic outlook is still more challenging. In such a situation, reviving the growth momentum has taken centre stage. The RBI has already indicated its resolve to support economic revival and is, therefore, setting aside possible transitionary components keeping inflation higher. The central government has also delivered fiscal stimuli and accelerated the reforms process. One would believe that policy rates will be kept low for the foreseeable future, with frequent interventions by way of liquidity injection and market operations. However, large supplies with apprehensions of a stubborn inflation may not allow interest rates to ease meaningfully from the current levels. We are looking at a range-bound interest rate environment in the near term. For investors with a long-term horizon, dynamic bond funds, banking and public sector undertaking funds may be appealing.

Take us through the additional checks and balances that corporates and large investors are looking at or demanding of their fund managers before investing in debt funds?

The Securities and Exchange Board of India has carried out major structural reforms in the debt fund space. Be it categorisation of debt funds, 100 per cent mark-to-market in liquid funds, a new framework of risk-o-meters or the revamped guidelines for inter-scheme transfers, each of these measures deals with several critical issues related to debt funds. Institutional and other large investors always attempted to evaluate portfolios on similar lines. When these measures are fully implemented, the information availability to large and small investors will be alike and uniform.

What is your outlook for inflation and interest rates for the coming year?

Food inflation has continued to remain high despite the economy opening up and supply chains being restored. Further minimum support price for many agricultural crops has been revised upwards recently. At the moment, the economy is still in contraction mode, credit pick-up anaemic, and lot of excess liquidity with banks. As the ongoing, seemingly irreversible Unlock 5.0 gains further momentum and demand revives, renewed pick-up in credit and dispersal of liquidity in the system is likely to keep upward pressure on inflation. However, the record high produces this year, a strong favourable base effect in the coming months, and further supply chain smoothening should help to bring inflation eventually in line with the RBI’s expectations. While inflation remains in the transitionary phase, interest rates are expected to remain low unless there is adverse change in the situation.

What are some of the learnings after the IL&FS and Franklin Templeton episodes for debt mutual funds?

The key learning is to avoid aggressive credits, too much concentration in the portfolio, and to retain adequate liquidity. The regulator has been undertaking structural reforms to address some of the long-standing issues facing debt funds, including improving risk and liquidity management framework as also disclosure standards. It is an ongoing process and there has been quite a bit of progress in the past few years.