Interest rate cycle close to peaking in India: Rajeev Radhakrishna

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Although the near-term market will be volatile with further spikes, the scaling up of duration will happen only gradually, Rajeev Radhakrishnan, CIO-Debt at Asset Management Company, tells Saikat Das. With the US Fed raising rates, dollar strength will weigh on emerging markets such as India, says Radhakrishnan, who manages about ₹2.3 lakh crore in assets. Edited excerpts:

What are the factors the RBI policy will weigh on next week?

For us, the impact is mostly going to come through the currency route, which the Monetary Policy Committee should factor in. Dollar strength will weigh on us as we are net importers with consumer inflation above the target range alongside continuing dependency on capital flows on the overall balance of payments. The RBI is expected to continue to focus on ensuring domestic inflation aligns closer to the target.

Liquidity has shrunk and is slipping into deficit. What are the options with the RBI?

A large part of liquidity drainage happens due to forex market interventions. This could stop for the time being if the intervention pattern changes. From a signalling viewpoint, the small lot of open market sales on the screen could stop. Today, the banking system has an excess SLR (Statutory Liquidity Ratio) of 9%, which banks can use for raising liquidity with the RBI.

Can India chart its own course when it comes to monetary policy without being in lockstep with global central banks?

While domestic inflation-growth metrics eventually decide the trajectory of policy rates, emerging markets are unlikely to have complete operational independence from the policies of the US Fed. Given the relatively open capital account, currency market dynamics would eventually have an impact in framing domestic monetary and liquidity policy.

When the rate cycle is on an upswing, debt instruments can only lose value. How best could you contain the losses?

We are close to peaking by way of the interest rate cycle in India. We have taken a bit of a long-term view on interest rates after having been conservative for a while. It is an opportunity for us to incrementally add duration to our portfolio. Although the near-term market will be volatile with further spikes, we are biased currently to scale up duration only gradually. The RBI’s clarity on aligning inflation close to target gives us confidence.

What is your duration band?

Until five months ago, we were hugging the lower end of the duration band in most products. That would be slightly higher across with a bias presently to be additive incrementally.

What can create volatility in the bond market?

The buzz over India’s global bond index inclusion coupled with evolving global scenarios will add to volatility. Also, the market is constantly adjusting to inflation expectations locally. Our policy rate expectations based on market pricing are going to be adjusted with the external policy rate trajectory. Apart from this, the demand-supply equation in the second half needs to be monitored.

What should be the debt investor’s outlook?

Investors should invest in debt funds with two views. First, there will be short-term volatility until the end of this fiscal. Second, we are closer to the end of the tightening cycle. The five-year government bond is 7.26%, which is quite attractive with no credit risk element. Investments should be ideally viewed from a three-year perspective which is apparently very favourable as of now in sovereign bonds.

What should debt investors do now?

We are saying, investors should invest on a staggered basis in duration products with sovereign securities as underlying, instead of allocating 100% of their investible money. Do it over the next four-five months. This is perhaps the best option to invest in bonds amid current circumstances.

Will credit funds be revived?

Credit funds faltered creating a crisis of confidence for investors a few years ago. A search for high yields after the demonetisation programme had made credit funds popular. Today, triple-A-rated bonds are traded with zero differential with the sovereign gauge. Spreads on non-AAA similarly marked up over AAA remain unattractive. Once the spread comes back, credit funds are likely to regain popularity.

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