Bias for interest rates is on the rise, according to UTI MF’s Amandeep Chopra
According to Almond Chopra, Group President and Head of Fixed Income, UTI MF. In an interview with Ashley Coutinho, he says RBI’s guidance in managing the large bond supply as it embarks on policy standardization will be essential. Edited excerpts:
The RBI’s monetary policy committee kept its key interest rates unchanged on Feb. 10 and maintained the dovish stance. Your thoughts on the same.
Policy was extremely dovish maintaining a status quo on rates, policy direction and guidance. The RBI has made it very clear that it does not see conditions warranting a change in either rate as it takes comfort from a declining inflation path (to 4.5%) for FY23, while the national economic recovery is still incomplete and requires continued political support. Furthermore, any political action would be “calibrated and well telegraphed” so as not to disrupt.
What do you think of the recent budget?
The budget for FY23 continues with the theme of social protection, the rural sector and infrastructure with the continuation of several micro-initiatives. This time, the focus is much more on technology than before. Financial support for a digital ecosystem for the financial sector, education, inclusion and ease of doing business, among others, clarifies the goal of preparing for a technology-driven future.
Positives include reasonable revenue estimates with upside potential given the assumed low nominal GDP growth and less reliance on non-tax revenue. Second, spending growth has been moderate without any populist agenda and a higher share of capital spending. Finally, the tax structure has remained stable.
What caused the spike in bond yields?
The higher forecast budget deficit figure for FY23 at 6.4% leading to a gross supply of Rs 14.95 trillion was a factor. This is the highest supply of sovereign bonds the markets have seen in a large demand gap environment, a gap which was closed by RBI in FY22. The other disappointment was that there was no amendment to tax laws for Indian bonds to be included in global indices. This was to create a demand of 10 to 30 billion dollars.
Going forward, PFR’s IPO and inclusion in the index could help address market concerns about funding the deficit. RBI’s guidance in managing the large bond supply as it embarks on normalizing its monetary policy to pre-pandemic levels will also be essential.
Will we see a spike in inflation like some developed economies are currently experiencing?
The inflation path for India in FY23 is expected to see some decline from the highs we saw in Q4FY22. Global inflation – food, raw materials, oil and consumer products – should still remain high. Some of the pressures on input prices and the pass-through of higher crude oil prices to retail fuel prices amid normalizing growth pose upside risks to the path of inflation.
What is your opinion on the trajectory of interest rates in India and globally?
Given the background explained above, the bias for interest rates is to the upside.
What types of debt products should investors consider now?
As markets adjust to the process of policy normalization, investors can focus on products that execute strategies to capture these trends with a low level of volatility. Asset allocation across a mix of debt products and keeping the investment horizon aligned with the fund’s maturity are important.
Investors may consider funds up to two years in duration such as Money Market, Ultra Short Term, Low Duration, Short Term Income Funds, Corporate Bonds as these funds will be ideal for those looking for low volatility.
Credit risk funds as a category have returned 9% over a one-year period. Is this the right time for investors to look into these funds?
Credit risk funds remain an attractive option for investors with a 3-5 year investment horizon, as the improving business cycle and supportive liquidity may reduce credit risk concerns, particularly for higher quality titles. Consider credit risk funds as part of your overall debt fund allocation and not in isolation.