In conversation with Gautam Kaul, Senior Fund Manager (Fixed Income) IDFC AMC.
"Current Time Offers Both Value And Volatility"
What’s your outlook on the Indian debt markets and yield curve post the Reserve Bank of India’s recent rate hike to tame the raging inflation and the falling rupee which hit an all-time low not long ago?
The combined fiscal and monetary stimulus during the lockdown has resulted in upward inflationary pressure the world over. This has forced central banks, led by the Federal Reserve, to commence on an aggressive rate hiking cycle. As the combined monetary and fiscal stimulus was much higher in developed markets at 15-23 per cent of the GDP than in emerging economies like India, the spike in consumption and inflationary impulse has been to a greater degree in those economies, resulting in the most aggressive rate hiking cycle seen in the developed markets in the last 40 years.
The Reserve Bank of India (RBI) on its part has been raising rates by almost 200 bps in an effort to normalise the monetary policy and tame domestic inflation. We believe that we are in the end game as far as domestic rate hikes are concerned. Repo rate, which is currently at 5.9 per cent, should peak at 6.25 per cent in the current cycle. Swap pricing suggests that Indian fixed income markets are more than adequately pricing the risks of further rate hikes and therefore we believe that the 3-5 Y point on the sovereign curve offers a lot of value for investors at the current point.
Is the current environment conducive for a relatively aggressive investor who would like to pursue a risky, high-yielding strategy?
The last two years have seen an above trend growth induced by monetary and fiscal stimulus as well as historically low interest rates. That was a good environment for risk assets. Going forward, as rates normalise and growth impulses reduce, the macro environment will increasingly become more challenging for high-risk assets.
Should investors in long Debt Funds and gilt funds stick to their investments during the rate hike cycle to maximise their returns?
Investors should maintain asset allocation to derive maximum value from markets over long periods. This is especially true during cycle peaks, and more so for high-quality fixed income allocation.
How will the forthcoming rate hikes by the Federal Reserve affect the Indian debt markets? Will the high volatility persist over the next few months? Also, which categories of funds are expected to do well?
Developed markets’ central banks are aggressively hiking rates. Bond market volatility has spiked as a result and liquidity has shrunk. India’s monetary policy also has to consider the spill-over risks from these developments. However, we still believe that the RBI doesn’t need to be ‘lock-step’ with the Federal Reserve. This view has been echoed in RBI Governor Shaktikanta Das’s commentary. That said, we believe that the current time offers both value and volatility. Investors would do well to choose the right products and extend investment horizons to ride through the current volatility.
How should a retail investor approach debt funds in the present scenario?
Investors should maintain asset allocation and stick to highquality debt funds.