Pranay Lakshminarasimhan Moneycontrol News
The change in RBI's policy stance to 'neutral' from 'accomodative' to neutral in a falling inflation environment is confusing the market, R Sivakumar, Head- Fixed Income at Axis AMC, said in an interview to Moneycontrol.
In its last four policy meetings, the monetary policy committee cut rates by 25 basis points, held rates, changed the stance on liquidity from 'accommodative' to 'neutral', and increased the reverse repo rate by 25 bps, in that order.
“In the last 3-4 policy meetings, the RBI has taken very different approaches to the interest rate outlook,” Sivakumar said.
“When they cut rates by 25 bps in October, they made a reference to the fact that inflation is approaching their intermediate target of 5 percent. Since then, inflation has only softened, driven by a fall in food inflation, and core inflation has also come off. But for some reason, RBI has gone the other way,” he added.
Sivakumar noted the RBI has shifted its stance without any change in actual developments on the inflation front. This has led to confusion on what the rate outlook is, and led to sharp selloff in the government securities market over the last couple of months.
Since the MPC’s meeting in February, the 10-year benchmark yield has risen from 6.43 percent to 6.84 percent, marking an increase of over 40 bps.
“There is a dichotomy between what the data is telling you and what the RBI is doing. The data is saying that inflation is under control. If anything, post-demonetisation inflation has slowed down further," he said.
"You may see a statistical uptick because of one-off events such as GST but the adjusted CPI may remain under control. So in that context, the hawkishness of the RBI is difficult to understand."
Speaking about foreign investor interest in bonds, Sivakumar said the high yields over the past couple of months have continuously attracted FIIs, mainly because at the current level India offers one of the highest real interest rates in the world.
“So say your 10-year AAA-rated bond gives you upwards of 7.25 percent. This is at a time when inflation is below 4 percent. So the real interest rate is really attractive, which is why debt flows have been extremely strong over the past couple of months.” he said, adding, from a global investor’s point of view, the carry being offered on Indian paper is one of the most attractive options for investment at the moment.
So where should investors invest their money?
“Our strategy is to basically stay at the short-end of the yield curve and stay away from the longer end,” Sivakumar said. “From a retail investor’s point of view, it becomes very important to match the investment horizon or the risk with the type of fund.”
He added if an investor is looking to stay invested for a few months, buying long duration funds is not a good option. Investing in liquid funds would be appropriate if the investor is looking to exit in a few days or weeks.
On the other hand, if the investor wants to invest in a longer-term fund, it becomes important to diversify the portfolio. The investor should ideally have allocations to both -- funds that deal with AAA-rated papers and those dealing with lower-rated papers.
“There are very clearly defined products in the mutual fund space,” Sivakumar said. “You have liquid funds, which are suitable from a few days to a few weeks. You have ultra-short term and short term funds that are apt for a few months to a year or two.”
Dynamic bond funds and income funds are apt for three years or longer, despite the seemingly higher volatility risk. “But over the three years, you will notice that the volatility has dampened, which is why it is the best way to invest in these longer duration funds,” he said.
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