In conversation with Gurvinder Singh Wasan, Senior Fund Manager and Credit Analyst, JM Financial Asset Management Ltd.

In conversation with Gurvinder Singh Wasan, Senior Fund Manager and Credit Analyst, JM Financial Asset Management Ltd.

Investors Should Start Investing With A Medium To Long Term Horizon

"There may be some near-term volatility on account of anticipated rate hikes and constrained liquidity"
 

What is your outlook on the Indian debt markets and yield curve post Reserve Bank of India’s (RBI’s) recent rate hike in its policy rates? Also, how will the forthcoming rate hikes by the Federal Reserve affect the Indian debt markets?
 

The RBI’s latest policy indicates scope for further rate hikes, majorly due to the persistence in core inflation. At the current juncture, the RBI remains highly focussed on anchoring inflation expectations since sticky core inflation above 6 per cent remains a factor of major concern. The risks and rewards for the domestic debt market remain broadly balanced. It is expected that the market will remain vigilant on incoming macroeconomic data. On the global front, continued hardening of US’ bond yields in expectation of future rate hikes could adversely influence both the domestic yield curve and currency. The RBI would likely remain nimble-footed and cautious of the future rate actions by the Federal Reserve. It is expected that the major central banks may pause rate hikes by mid-2023. However, until that time the domestic sovereign yield curve could remain relatively flat.
 

Would an investor who prefers a high risk, high return strategy find the current market environment favourable for pursuing such an approach?
 

All investment decisions should primarily be based on the investment horizon depending on the cash flow requirement of an investor. The interest rates have moved up considerably since May 2022 with the RBI embarking on a rate hike cycle to contain inflation. There may be some near-term volatility on account of anticipated rate hikes and constrained liquidity. However, investment tenure of 3-5 years could provide an attractive investment opportunity in terms of accrual and capital appreciation in the current scenario.
 

What is your take on the Union Budget for 2023-24 and its impact on the 10-year benchmark bond yield during the fiscal year?
 

The government struck a fine balance between fiscal consolidation and supporting growth in the Union Budget 2023- 24. In addition, the borrowing programme announced for 2023-24 at ₹ 15.4 lakh crore was lower than the general market consensus. The government aims to spur growth momentum through heavy capital expenditure while the RBI battles against the stubborn inflation through rate hikes. Fiscal monetary policy coordination should augur well for the overall health of the economy. Nonetheless, it remains to be seen how the market will absorb the huge supply in 2023-24 given constrained liquidity conditions. Continued rate hikes coupled with tight liquidity conditions could dampen the demand for dated securities. Any shortfall in the government’s revenue could also adversely affect the fiscal position. The RBI may need to support the borrowing programme in the second half of the year.
 

"There may be some near-term volatility on account of anticipated rate hikes and constrained liquidity"


Given the present scenario, how should a retail investor approach Debt Funds?

In the current interest rate regime, money market rates have already moved up by almost 300 bps compared to a year back. Real interest rates have now moved into a positive territory providing an attractive investment opportunity. Inflation is expected to moderate during the year and there are uncertainties pertaining to growth. Hence, in the current scenario, investors should start investing with a medium to long term investment horizon. Investors could get an attractive blend of accruals with the potential of capital appreciation in the medium to long term.

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