ICICI Pru MF's Gupta says ample liquidity to stay; inflation to not cross RBI target

Below are the verbatim excerpts from the interview:

What is your take on debt market outlook?

Our internal debt valuation models suggest that valuation wise debt is at an attractive spot. Low current account deficit (CAD), a stable currency, government’s commitment to stick to fiscal consolidation path and RBI’s stance of targeting inflation at 4 percent, can together help in lowering inflation expectations, which, in turn, is positive for interest rate markets in medium term. Hence, we recommend investors to consider investing in short-to-medium term duration funds as they are likely to offer better risk adjusted returns.

What do you think about global yields inching close to highs and a Fed rates hike? Will this impact our fixed income market?

With target inflation gap expected to be lower at ~2 percent (India’s central bank is looking to target 4 percent inflation and Fed’s target being 2 percent), spreads in yields between the US and India are expected to narrow. In fact, we have seen US yields trending lower post the rate hike decisions. RBI keenly watching the inflation trajectory and its firmness on achieving inflation targets is expected to benefit Indian fixed income markets.

With improving economic fundamentals, India has the potential to absorb the external shocks much better.

FIIs have started looking at India after being net sellers in November-December?

The Indian debt market has witnessed renewed interest from foreign institutional investors (FIIs) owing to attractive real interest rates offered on investments coupled with stable currency.

Do you think inflation might inch higher?

We do not expect any sharp spikes in inflation numbers in near- to medium-term. Post the latest forecast of a normal forecast from India Meteorological Department, upside risks to inflation remain low. We expect the inflation to average at about ~4.25 percent for the current fiscal. As government’s fiscal consolidation continues and proactive supply management can play a critical role in staving off pressures on headline inflation.

Do you think the RBI will reverse its stance soon?

RBI has indicated that any further action on the rate front will be data-dependent. We expect retail inflation to undershoot RBI’s inflation trajectory which in turn may make room for relatively easy monetary conditions by the RBI.

What is your outlook on short-term money market instruments?

Given that surplus liquidity is likely to remain in the system, the spread between money market instruments and the overnight rate may continue to remain range-bound in near to medium term.

Experts have been saying it is the right time to look at accrual funds. What is your take on this?

As long as real interest rate remains high, strategies such as short to medium term accrual funds can offer very attractive investment opportunity for investors. Also, as part of overall investment portfolio, investors should definitely have exposure to accrual funds as they offer good risk adjusted returns.

What is the macro strategy that you follow while selecting a bond or a debt papers?

Based on our fixed income fund investment philosophy, the investment objective derived is to optimise risk-adjusted returns. This is achieved by investing in high credit quality fixed income securities, managing interest rate and liquidity risk. We seek to achieve safety, liquidity and returns (SLR) in that order of priority while managing funds. We as a fund house have a rigorous credit evaluation process, post which, we look at the relative value of the securities available v/s sovereign/AAA rated paper. Other than this, possibilities of a potential credit outlook are important factors that will be taken into account.

Are retail investors looking at debt products or are they shying away?

Over the last few years there has been a marked improvement in the way we see retail investors approaching the debt market. However, there still is a huge scope for investors to shift from traditional investment avenues to debt mutual funds, which offer multiple products both for short to medium term and long term investment goals.

What is your advice to investors?

Debt market offers a variety of funds as per one’s investment horizon and risk appetite. Accordingly, an investor can decide on the type of debt fund that suits their investment goals best. Since getting asset allocation right is the key to long-term wealth creation, we would advise an investor to visit their respective financial planner who can aid the investor through their investment journey.