We saw RBI pausing the rate hike in the last meeting itself and with the repo rate coming in at almost 6.5%, while the US Fed increased rates by almost 25 basis points. A lot of changes are happening globally. As a debt fund manager, how do you see the global rate outlook going ahead?
From a perspective on global markets, you are right that yes we have seen the Fed hiking for the last time probably and the commentary from the Fed governor has been that if the data somewhere down the line has started to weaken, we can expect a pause in the next Fed policy. Coming to RBI’s monetary policy, the central bank took a bold step and probably surprised the market with a pause. The local data, specifically on inflation, has started showing a downward trend and we believe that if I look at the Q1 projections for CPI, even if we look at Q2 and the near-term trajectory on growth where growth indicators have started to peak out, RBI can continue to remain on a pause despite the global outlook where we can see a probability of a Fed hike also. Our view is that the Fed will be pausing in June, but a small probability is there that the Fed can hike rates also. Even if the Fed hikes rates, we believe that RBI will continue to be on a pause. When it comes to India also, we believe we have reached the peak of the interest rate cycle and from here on, interest rates should start moving lower.
We have completed a full cycle in debt and what is your view on the 10-year, one-year and the medium-term bonds and government bonds especially? Also as a strategy, will you be looking at a longer tenure now?
I think 10-year bond yields will start rallying in expectation of inflation, macroeconomic data weakening, as well as expectation of rate cuts getting built in. So, as a part of the rate cut cycle has already started getting priced in, over the next six months or so, we will start pricing in more rate cuts.
Our belief is once the rate cut starts and Fed starts to pivot, the Fed will be cutting significantly but from RBI’s perspective also, we anticipate around 50 odd bps of rate cut in the next 12 months. With that anticipation, with 6% operative rate, the 10-year bond yields can hover in 6.5-6.75% range.
From the next 12-month perspective, we believe that 10-year bond yields from the current level of 6.95-7.05 band can move to 6.60-6.75 band. Also, our belief is that next year onwards, we will start seeing some fiscal consolidation for the fiscal year also and because liquidity is significantly tight, we believe that RBI might do some OMOs in the second half. All this will also augur well for the long funds.
As the interest rate cycle peaks, we have started adding duration to all our portfolios and the choice generally because of various rate cutting cycles is that the long bonds perform first, the short end of the curve is very reflective of the operative rate and when we start seeing rate cuts is when the short bonds start behaving well and give some capital appreciation.
For the initial build and strategy in our portfolios, we have added long bonds to all our funds and the strategy for investors also should be that till the rate cut happens, the rally will be massively driven by long bonds and once the rate cut starts, the short to medium term funds will make a lot of sense for investors.
What do you prefer among corporate bonds now that we know that there are no liquidity issues?
Our understanding is that the corporate bond spreads are okay and we have not seen significant corporate bond supply in the long end of the curve. Our belief is that today if you look across, you have to play the interest rate cycle. One can start up to the five-year segment and the corporate bond spreads look attractive to us. Beyond five years, we prefer the government bond segment.
So, for long bonds, we generally advise clients to play it through the G-Sec or G-Sec oriented funds. When it comes to the short to medium term categories – the three- to five-year segment – the corporate bond spreads at 45 to 50 odd basis over G-Sec, looks neutral to attractive to us.
How has the fourth quarter earnings been so far?
The fourth quarter earnings have been quite, even strong, except for a couple of sectors. The overall guidance continues to remain strong. We have seen a massive increase in EBITDA margins and that is because of the lower costs, thanks commodities, thanks to the supply chain getting eased, oil and overall commodities easing. That has led to a significant improvement in margins. As of now, the push on the growth side has been more government led. Corporate capex has started somewhat. We believe today where the demand still remains healthy, corporate balance sheets have significantly got deleveraged. From a credit cycle perspective, we do not see any stress in the near term. For the next 12-18 months, we do not see any major issue.
