What are your views on fixed income market? How have the yields moved and which direction you see them moving in near to mid-term and why?
The current debt market scenario is balanced from rates perspective. We have seen a sustained trough in growth numbers even as inflation has proved to be sticky, esp. Food and fuel inflation. We continue to face threat of food and fuel inflation escalation in view of uncertain monsoons and the geo-political tensions in Iraq & Ukraine.
On the other hand, the new government seems to be having the will to take measures which are tough in the short run but highly beneficial in the long run. In this backdrop, we can expect RBI to take a wait and watch policy as the monsoons, international events and government plans regarding supply side constraints unfold. We may expect RBI to hold rates steady for now and the debt markets, in the short run too may maintain a broadly status quo position. In other words, we may expect a sideways movement in market yields for the coming quarter.
What is your strategy for short term funds? What is your exposure to long term funds and why?
Short term funds such as Liquid Funds and ultra short term funds are broadly guided by the market liquidity situation and overnight rates. Over the past few months RBI has not tampered with the overnight rates majorly and has kept a close watch on market liquidity. They have ensured that liquidity doesn’t go into severe shortage or turn excess, thereby tempering market movements. As of now, the markets expect RBI to maintain rates and eventually soften them.
In this context, short term funds have been seeing a gradual decline in portfolio returns while ultra short term and other funds have seen some capital gains on account of softening market yields. We expect this trend to continue for the coming months are positioned to gradually increase duration to take advantage of the yield movements.
FIIs have shown good interest in the market? Will this continue and why?
FIIs are typically drawn to Indian debt markets on account of the large interest arbitrage existing between developed economies and us. Currency fluctuations and prospects of a dwindling growth story had reduced the flows in the recent months. However, with the new government in place and the positive energy associated with it, has led to many of the FIIs coming back to our debt markets.
Going ahead, given that we expect a gradual softening in interest rates and that we are broadly seeing a stable currency as of now, we expect FIIs to continue showing confidence in our debt markets.
What reforms you expect for curtailing fiscal deficit and why?
A lot of bandwidth has been devoted to this area and its worth commenting on. The fiscal deficit is a function of the gap between revenues and expenses. India has struggled with fiscal deficit in recent past on account of the decline in revenues on account of a sluggish economy as well as burgeoning expenses.
India is facing sever supply side constraints and the matter is aggravated by increasing food and fuel prices. What is needed is a coherent and actionable plan to kick start the economy and promote investments which can be the starting point of increasing revenue. The government also needs to remove the many supply side constraints and roadblocks in order to promote an environment of growth.
On the other hand, the above needs to be done in such a way that inflationary pressures are don’t go out of hand .clearly, this a difficult tasks and the government has its job cut out for itself.
What are your Union Budget 2014-15 expectations? What are your expectations from Budget for Mutual Fund industry?
A lot of expectations have been built around the new government including on the fiscal front. However, given our economic situation, it seems unlikely that the budget shall be a populist one. Indeed, the budget may have some tough measures which are beneficial in the long run. Debt markets are usually concerned with the fiscal deficit numbers and a lot of attention will be focused on that area.
It is not lost on participants that the steps which may be taken to spur growth may prove to be inflationary if not balanced well. This balancing act is admittedly difficult and we shall be watching closely how the new government approaches the difficult situation. From the MF industry per se, not much is expected from the budget in a realistic sense though some sops to assist the struggling sector may be welcome.
What’s your investment strategy? If the interest rates fall from here what will be your strategy for long term debt funds?
Our medium to long term view of the domestic debt markets has an undertone of bullishness. We are positive about Indian bond markets and feel that the 2-5 year segment shall do well in the coming months. In the coming 2 to 4 quarters, duration products such as Dynamic funds and hybrid funds such as MIPs shall do well. Those interested in locking into interest rates may do well to participate in FMPs and CPoFs.