Mr. Sujoy Kumar Das
Head – Fixed Income Invesco MF.
Q. What is going to determine the policy rate trajectory post elections? How do you see the trend moving in short to medium term of say another 1-2 years from here?
Answer: We think that the growth and inflation dynamic justify policy rates to go lower. Headline inflation has been much lower than RBI’s expectation. RBI forecast for inflation by end of fiscal 2020 is under 4%. Q4 2018 GDP growth came in weaker at 6.6% with high frequency data showing slow growth ahead. Post the 50bps rate reduction over Feb and April’19, inflation and growth factors are primarily going to determine the policy rate trajectory post elections. We think there could be a short pause post elections as RBI assesses growth outlook especially as pent up investment and capex normalizes post elections.
Over the next 1-2 years from here, we think global factors will start to weigh for Indian policy rates. Since the global financial crisis in 2008, the world has seen a long stretch of benign economic cycle along with increase in global debt and fiscal deficits across developed markets as well as emerging markets. We think there is a reasonable chance of global economic slow-down over a 1-2 year timeframe, which can cause policy rates to go materially lower from here.
Q. How has been the investment flows into debt markets in recent times? Where has been the money primarily moving?
Answer: The Fixed Income market saw risk aversion since middle of last year as the IL&FS default event sent shock-waves through the system. Markets have seemingly overcome that event as credit spreads have started to soften from the peak and also seen positive flows over last few months. Investors have been more selective investing in debt markets with shorter duration funds and Liquid / Money market funds seeing inflows. However, now that there is a rate reduction cycle underway with RBI trying to work out measures to ensure the effective transmission of lower rates into corporate sector we feel informed investors will start to move into long duration of the market.
Q. What important factors should investors consider before investing into debt funds?
Answer: Multiple factors affect investing in debt funds. Some of the key things to consider are (1) Investment horizon - this helps to determine whether Investors should invest in short duration or long duration funds; (2) Risk appetite – this helps to determine how much credit risk / duration risk is appropriate for the investors. Higher risk appetite can guide investing in funds with higher credit and/or duration risk; (3) Liquidity – requirement for liquidity helps determine what fixed income fund an investor selects. Some fixed income funds invest in less liquid securities and may have exit loads.
Q. What has been the recent investment behaviour foreign funds / FIIs in the Indian debt market?
Answer: Foreign Portfolio Investors (FPIs) are usually quite cautious around election time. This is reflected in cumulative outflows of approximately INR 1,000 crores for the first three months of 2019. The cumulative figure however masks a turnaround in sentiment in March which has seen a huge 14,400 crore inflow in debt markets
Q. What has been your investment strategy - both on the duration side and credit side in the current markets?
Answer: Coming into 2019, we thought that the conditions exist for rates to rally on back of cut in policy rate and lower inflation. That however will be somewhat offset by tighter liquidity in the system and higher securities issuance by the central and state governments. As we stand, we think 10 year government bond yields have further to rally as RBI will focus on transmission of the 50 bps rate cut since beginning of 2019 and liquidity in the system improves on back of series of pro-active steps undertaken by RBI.
On the Credit side, we prefer quality names as opposed to chasing higher yielding names. We think that lending to NBFC sector, which froze since middle of 2018, has thawed but there are still some challenges within the sector.
Q. What would be your advice to a purely debt investor for different time horizons of say over 1 year, 3 years and 5 years. In what products should he invest in?
Answer: We think there are good opportunities in the fixed income markets for investors across different time horizons. High yields and high credit spreads across maturities provide good income as well as total return opportunities to fixed income investors because we think that the path of interest rates is lower from here and of credit spreads is tighter from here. The risk return matrix is tilted in favor of longer duration funds for investors with 3-5 year investment horizon. For investors with 1 year horizon, shorter duration high quality corporate bond funds are suited in this environment.
DISCLAIMER: The views are expressed by Mr. Sujoy Das, Head – Fixed Income , Invesco Asset Management (India) Private Limited. The views and opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The sectors referred above should not be construed as recommendations from Invesco Asset Management (India) Private Limited and/or Invesco Mutual Fund. The Scheme may or may not have any present or future positions in these sectors. The views and opinions are rendered as of the date and may change without notice. The recipient should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. Invesco Mutual Fund/ Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.