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In a conversation with Peter Noronha, Sujoy Das, Head – Fixed Income, Religare Invesco Mutual Fund shares his opinion on interest rates, bond markets and investing in the debt segment.
Interest rates in India seem to be headed downwards in the near future. What does this mean for the investment cycle in general and for personal finances in particular?
As interest rates head lower, the purchasing power improves as individuals’ burden of EMI outgo lessens while leveraged companies experience lower financing/re-financing cost. This would result in pick-up in spending and lower input costs and ultimately in higher demand/spending. Consequently, it leads to pick-up in the investment cycle. Personal finances also improve as there is a perceptible improvement in finances as disposable income improves with lower interest burden.
Given the forecasted softening in interest rates, should individual investors opt for bond funds with a higher maturity and duration? If so, what would be your approach vis-a-vis short- and medium-term bond funds?
Investors should select debt funds with portfolio duration longer than their target investment horizon. Hence, selection of bond funds or medium-term/short-term funds would depend on their individual investment horizon. This is necessary so as to select funds relative to the investment period and stay away from funds with relatively higher maturity as the rate decline phase might not be smooth and is prone to volatility resulting from both domestic and international factors.
What are you advising your clients in terms of an ideal asset allocation mix given the road ahead for equities and the debt market? Is it a good time to add more gold to the portfolio? Why / why not?
Investors are advised to get into bond funds and credit funds alike as both these type of funds are expected to benefit from declining interest rates. Credit funds are also expected to benefit from credit rating upgrades resulting from a decline in refinancing costs and pick-up in revenue growth; an improvement in the purchasing power will subsequently lead to stronger balance sheets. The road ahead for debt seems to be a decline in interest rates and hence investors are encouraged to pick funds with portfolio duration longer than their investment period. Over the medium-term, gold as an investment is a hedge against inflation. As inflation within the economy experiences a sustainable decline, the price of gold is also expected to mimic a comparable performance.
The fixed maturity plans (FMPs) have seen 30% erosion in their assets under management in the past one year due to changes in the tax norms. Do you see a churn in the debt mutual fund space, with money shifting to arbitrage and income funds?
Investors will continuously identify products suitable to their needs and altering market cycle.
Some would suggest that US dollar and stiffening in US bond yields may have run its course. Is it therefore a right time to look at bonds of emerging markets such as India?
Indian bonds right now are in a sweet spot due to improving macros emanating from lower CAD, lower inflation, consolidating fiscals, historically high forex reserves and a focus on manufacturing. Also, with the rupee likely to be stable and possibly strengthen, given the strong domestic macros, there is a strong case for an investment in Indian bonds. A sustainable decline in inflation also opens up room for easing rates in India and with high running yields this will add to the steady stream of income.
Some experts suggest that the global bond markets will be the next big bubble to bust. What are your views?
Liquidity pumped into the markets through successive QE programmes by central bankers across the world has found its way into several assets including bonds. This has led to bond yields falling down to multiple year lows. While the leverage levels appears to be lower than the past, a sharp jump in yields at this point due to sentiment altering or central bank action will lead to massive erosion of wealth and bursting of fresh capital formation. Any such move needs to be coordinated by central bankers and has to be gradual over multiple years and has to allow significant passage of time so as to allow contraction of balance sheets before any rate hike cycle.
The RBI has managed to maintain a healthy spread of interest rates over retail inflation. What is your outlook for the rupee, given the expectations of a rate cut going ahead and the rupee's out-performance against the dollar in this year?
Theoretically, over the medium term, the behavior of the rupee would track the differential inflation between India and US. Since inflation in India is treading lower (target 4% in 2 years) on a sustainable basis and efforts are being made in US to pull up the inflation closer to 2% over the medium term, the differential inflation between the two economies will contract in due course of time. This should reduce the volatility of the Indian rupee over the medium term and bring down the possible depreciation to sub-2%. However, the Indian rupee might reverse the trend of marginal depreciation into stable to marginal appreciation given the possibility of strong foreign inflows on the back of promising domestic macros.
