"We are expecting inflation to cool off below five per cent" - Yadnesh Chavan, Fund Manager, Mirae Asset Global Investments

• Since the debt market has rallied too much with the 10-year GSEC at a near three-year low, investors can time their entry into long duration funds as the confidence in the economy is based on the government’s deficit and rate cut expectations from the RBI. Until then, investors can look at short-term bond funds where they can keep earning decent returns with a limited interest rate risk.
• Equity and debt markets work on the same set of fundamentals. The basic macroeconomic fundamentals work in a similar manner but some events can affect both the markets in different ways in the immediate term. One difference could be the return differentials which are lower in debt, and hence the debt fund manager has to be on his toes for managing interest rates and credit risks.

Looking at the higher yields in the Indian bonds, along with expectations of a stable INR, a lot of foreign investors will invest in India, says Yadnesh Chavan, Fund Manager - Fixed Income, Mirae Asset Global Investments (I), in an interview to Saikat Mitra

With respect to the Indian debt markets and Indian investors, how challenging do you find the fund management industry?

Indian investors have various options for debt investments. A large chunk of debt investments are channelised into bank FDs, PPF or other government savings products with tax benefits. In this environment, it is challenging to get the mindshare of retail investors. However, mutual funds have started gaining traction in FMPs and income funds. 

What is the difference between managing funds on the debt side and on the equity side?

Debt funds are managed while taking into consideration the macro environment of the economy whilst equity is more bottoms-up stocks picking with an overlap of macro indicators.

Debt funds are not that as popular as equity funds among retail investors. So as a fund management house, what are you doing to popularise debt funds?

Compared to many foreign countries, interest rates in India are on the higher side. We are trying to provide simple products with low credit risks for investors to increase the penetration of debt funds.

Do you follow any particular investment philosophy when you talk about Mirae Asset as a fund house?

The basic fundamental principle that we follow at Mirae is ‘Clients first’. With this philosophy in place, we are offering products based on clients’ risk appetite and time horizon of their investments.
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There have been talks about a cut in key policy rates in the forthcoming RBI meet (June 2013). What is your take on the interest front and how do you see it panning out going forward?

We are expecting inflation to cool off below five per cent because of falling commodity prices and base effects. This will provide enough room to the Reserve Bank of India for cutting the rate by another 25 basis points (bps) in the forthcoming monetary policy meet (mid June). Overall, we are anticipating a 50 bps rate cut in the current fiscal.

What is the likely impact on bond yields of different durations (short as well as long) with the rates cooling down?

On the fixed income markets front, we feel that the emerging credit deposit equation will play a vital role in deciding the direction of interest rates. On the longer term segment, we feel that the pick-up in the economic activity will provide more comfort to the markets, as it will improve the fiscal situation and will also force banks to raise more deposits to fund the credit off take, which in turn will create additional demand for government securities. Also, short-term CD yields will remain subdued because of a lack of supply at the beginning of the FY14. The return on liquid funds will follow the movement in CD yields.

What is the right strategy to invest in debt funds, especially when interest rates are falling?

In the current economic scenario, the overall market expectations are about an overall 50 bps rate cut for FY14, because of which the current high interest rate regime is expected to change going forward. This will thus be the best time for investors to revisit their fixed income strategy and shift their investments in funds with a longer duration.

The bond markets have not developed as expected. What according to you has gone wrong and what steps should the government or the RBI take to develop it?

The size of the government borrowings is giving very little room for corporates to issue bonds. From the RBI’s perspective, the open market operations are helping in absorbing the supply of government securities. As the fiscal situation will improve, it will provide space for corporates to raise money through bonds.

Do you think that there are more limitations to a debt fund manager as compared to an equity fund manager?

We cannot exactly say that there are limitations for debt fund managers. Debt funds offer investors stable products where they can define their investment horizon and risk profile more specifically by selecting different kinds of funds.

Broadly speaking, both equity and debt markets work on the same set of fundamentals. The basic macroeconomic fundamentals work in a similar manner but some events can affect both the markets in different ways in the immediate term. One difference could be the return differentials which are lower in debt, and hence the debt fund manager has to be on his toes for managing interest rates and credit risks.
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Going forward, how do you think the crude oil prices and gold prices are panning out?

Gold prices have peaked out in dollar terms (USD 1930) and are likely to trend in a range-bound manner as the US economy is showing signs of revival. The crude market is currently over supplied, except geopolitical threats. We thus expect oil prices to peak.

How fast do you think the government will be able to dissipate the twin deficit gap?

Lower global commodity prices should help narrow India’s twin deficits. For gold, USD 100/oz should save USD 3 billion (0.15 per cent of India’s GDP) on the trade deficit. For oil, USD 10/barrel swings USD 8 billion which is 0.4 per cent of the GDP on the current account deficit (CAD), and 25 bps of GDP on the fiscal deficit. Hence, we feel that both the current and fiscal deficit will be lower in FY14 vis-à-vis FY13.

What is your take on the Euro zone crisis?

Overall, the growth movement in the Euro zone is divided between Germany and rest of the Euro zone. We expect a growth of about a per cent in its economy in FY14.

The European Central Bank (ECB) has taken several steps towards enhancing its economy by injecting liquidity in the economies and averting any financial crisis and we feel that the ECB will keep supporting the Euro zone.

How does it impact our markets, especially bond markets?

The Government of India has rationalised norms for foreign institutional investors (FIIs) to invest in domestic debt. The government has removed the sub-limits within the USD 25 billion limit for FII investments in government securities, and USD 51 billion limit for corporate debt. It has also introduced an on-tap system for allocating debt limits to FIIs, replacing the existing auction mechanism. The government has reduced the taxation on FIIs.

If the Euro zone slowdown continues, it will force the Fed and the ECB to maintain subzero interest rates, as there are also chances of further quantitative easing which will lead to an improvement in global liquidity. Looking at the higher yields in the Indian bonds, along with expectations of a stable INR, a lot of foreign investors will invest in India which will create a good demand for Indian bonds and improve liquidity substantially.

What would you advise investors in the Indian markets at this juncture?

Since the debt market has rallied too much with the 10-year GSEC at a near three-year low, investors can time their entry into long duration funds as the confidence in the economy is based on the government’s deficit and rate cut expectations from the RBI. Until then, investors can look at short-term bond funds where they can keep earning decent returns with a limited interest rate risk.