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WF: A section of the market believes the bonds bull market is over while another argues that the cycle has been actually extended by RBI's recent policy announcement. Is the bonds bull market now over? How do you read the RBI's action and what are implications for markets going forward?
Akhil: The biggest takeaway from the Union Budget and February Monetary policy was that Indian policymakers will not trade-off macroeconomic stability for short term goals. Both monetary policy statement and MPC minutes indicated that RBI is committed towards bringing headline CPI closer to 4.0% on a durable basis and in a calibrated manner. This would mean a longish pause in easing cycle. A stance change to Neutral doesn't necessarily mean end of easing cycle but it does raises the bar of further easing. As market participants realigned with current stance and revised their expectations on future interest rates, bond market witnessed hardening of yields across the curve and may see this trend continuing in near term.
The surplus banking system liquidity is going to persist for next 6-8 months and will limit upside in short-end of the yield curve. Domestic Inflation trajectory will play a key role in determining future direction of monetary policy and hence bond yields. Indian bond market will also look for cues from movement in global bond yields and commodity prices.
WF: Some advisors are actively switching out from duration and dynamic bond strategies and into short term funds and FMPs. Is this the best way forward now?
Akhil: I think one should ask investors to stay invested for a longer time period and choose product category depending upon their risk appetite. If one has greater appetite for risk and longer holding horizon, duration funds can still be considered, whereas for investors with shorter investment horizon and / or lower risk appetite, short duration funds could be considered.
Duration fund investors should also draw some comfort from Indian policy makers. RBI is trying to be ahead of the curve in its fight against inflation and government is committed towards path of fiscal consolidation. Both these factors put together augur really well for long term investors in duration funds.
WF: Distributors who have been aggressively pushing debt funds to target swelling savings account balances post demonetization, have become a little circumspect after the recent bout of volatility. In light of current market conditions, what would you recommend as the most suitable product categories within fixed income funds to recommend in this context?
Akhil: If one needs high liquidity, then liquid mutual fund schemes are ideal and if one is comfortable with slightly longer investment horizon then I would recommend short-term funds and high quality accrual funds as a good alternative to savings bank account.
WF: Some experts believe that dynamic bond funds have taken a confidence knock as most of them were not positioned appropriately for the RBI's surprise decision. Is sticking to accrual funds the prudent thing to do for retail investors or is there still a good case for dynamic bond funds?
Akhil: I agree with you that most of the market participants were surprised by the RBI's change of stance in February but I think RBI gave sufficient hints in its December monetary policy (where it maintained status quo on rates despite market expectations of 25-50bps cut). Few duration fund managers (including ourselves) had reduced duration in the run up to the February policy.
But having said that, I must also add that one should always keep in mind his/her risk appetite and investment horizon. An investor with lower risk appetite, accrual funds are a prudent thing to do but if someone wants to invest in systematic interest rate market across cycles and wants to take long term bet on Indian economy, dynamic and duration bond funds are still a very attractive investment proposition.
WF: A couple of months ago, global markets were extremely worried about the potential bursting of the bond bubble and its dire consequences. That talk seems to have subsided now, and markets seem to be relatively calmly looking at a couple of Fed rate hikes this year. Is there any reason for us to worry about global bond markets now?
Akhil: Indian bond markets are also susceptible to global bond market volatility albeit lesser in comparison to other emerging markets. US Fed is on track to deliver 2 or may be 3 rate hikes this year and there is fear of global inflation. And as US, Europe and Japan move towards normalizing their ultra-accommodative monetary policies, global bond markets are bound to witness periods of volatility.
But a strong political mandate and a prudent central bank, maintaining financial stability through sound monetary policy, had made India a favourite destination for global investors. Indian Bonds are still under-owned by FIIs and RBI has been following a gradualist approach in raising the sovereign debt limit for FIIs to maintain the financial stability. Although India was not entirely immune to EM debt outflows witnessed during Q4-CY2016 but relative outperformance of INR and prudent policies of both Government and RBI reinforces the notion that Indian policymakers - in a turbulent global environment - will not trade-off macroeconomic stability for growth. This signalling by policymakers will augur well for global funds allocation to Indian fixed income market but factors like rising US yields and rising prices of crude and other commodities may deter FPIs from coming to India in an aggressive manner.
WF: Where do you see the best opportunities now in our fixed income market?
Akhil: One should decide based on his/her risk appetite and investment horizon. If one is looking at next 1-2 years horizon, short-term funds and high quality accrual funds present an ideal investment opportunity. I feel that stance change to Neutral by RBI has raised the bar for further easing and there will be limited number of opportunities to generate capital gains through higher duration. Therefore, one should aim for regular accruals and should not chase capital gains aggressively.
WF: How have you positioning your suite of fixed income funds in the current market context?
Akhil: We had consciously reduced duration in our funds post December RBI policy and continued with this stance post February policy as well. We believe that with RBI changing its stance from 'Accommodative' to 'Neutral' there is going to be long pause in policy rates. We see a range bound market in coming year and in such an environment duration may not generate alpha. Hence we are running lower duration in all our funds with focus on regular accruals.
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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