 "Suyash Choudhary, Head – Fixed Income, Bandhan AMC")
While the growth-inflation trade-off emanating from the tariff impacts is somewhat tricky for the US, it is relatively clearer for India as inflation is under control, according to SUYASH CHOUDHARY, head-fixed income, Bandhan AMC. In an email interview with Abhishek Kumar, Choudhary says expectations of resilient economic growth and fiscal discipline make Indian government bonds appealing. Edited excerpts:
India’s debt market has largely remained insulated from global trade tensions. What are the reasons and can it sustain?
The weakening of the dollar reflects some unwinding of the so-called “US exceptionalism” theme, which had attracted disproportionately large allocations to dollar assets over the years. This is good news for India and other emerging markets, as it has reduced pressure on local currencies. As a result, the Reserve Bank of India (RBI) now has a greater degree of independence in conducting monetary policy.
While the growth-inflation trade-off emanating from the tariff impacts is somewhat tricky for the US, it is relatively clearer for India. Inflation is well behaved here, thereby allowing RBI to focus on whatever growth risks may be at play as a result of the direct and indirect effects of the tariff. Thus, RBI has responded proactively with significant liquidity infusions alongside rate cuts. This has allowed Indian bond yields to fall even against the backdrop of US bond volatility.
If the dollar diversification trade persists, then it is possible that the impact on India will remain low. However, for the local bond market performance to continue, US rates also need to settle down at some point.
How do you see the growth-inflation dynamics currently? Do you expect the rate cuts to continue?
India’s inflation trajectory appears fairly benign, barring any weather-related pressures on food prices. RBI’s forecast also projects inflation to remain mostly around target levels in the year ahead. Economic growth is likely to remain resilient but may encounter some cyclical headwinds in the near term due to global factors.
The RBI is expected to have ample room to continue responding to this cyclical drag. We anticipate a terminal repo rate of 5.5 per cent, with downside risks if the impact on growth turns out to be greater than currently expected. At the same time, the central bank is proactively managing liquidity to ensure efficient transmission of rate cuts.
You remain bullish on long-term bonds despite looming uncertainties. Is the risk worth taking?
Given the weakening of the dollar and local monetary policy space, the outlook for bonds remains positive. Further, we expect the government to continue with a conservative fiscal stance even as some minor widening of the deficit may occur if tax revenues slow down.
This fiscal discipline adds to the appeal for Indian bonds. As real money investors, duration matters to us and we see no reason not to optimise on this parameter. Long duration bonds look particularly attractive now after the curve steepening that has taken place over the past few months.
What is your view on corporate bonds and state development loans (SDLs)?
The corporate bond curve has lost its inversion in line with our view and is now of a more normal shape. This allows for increasing allocation towards the mid-duration segments (up to five years) on the corporate curve. SDLs also look good till intermediate segments of six-seven years. However, for longer duration exposures we still prefer the government bond curve since we find the demand-supply dynamic there to be the most favourable over the medium term.
Which schemes would you recommend to investors with a two to three year horizon?
The number one priority for investors should be to plug reinvestment risk. This can be done through appropriate duration selection in line with risk appetite and investment horizon. For the most part, mid-duration funds (three-six-year maturities, as an example) may suffice. Some allocation to active duration may also be warranted, provided the investment horizon here is long enough.
