Reliance Nippon Life AMC debt CIO Tripathi sees 10-yr bond yield at 6-6.25%, more rate cuts in FY18

Tripathi also said further monetary policy actions by RBI action will be data-dependent.

He feels inflation may inch up slightly from the current levels but it is unlikely to cross the 4-percent levels till March 2018.

The Consumer Price Index (CPI) inflation came in at 2.36 percent for the month of July, as against a market estimate of around 2 percent.

Speaking about the liquidity scenario in the banking system, Tripathi says RBI will keep on absorbing excess system liquidity but given the current growth-inflation dynamics they would be reasonably accommodative there as well. 1-2 percent of NDTL can be a reasonable assumption

Below is the verbatim transcript of the interview:

Q) What is your take on debt market?

Tripathi: The market continues to build in expectations of continued accommodation by the RBI both in form of rate cuts as well as benign liquidity conditions. This view is on basis of the current dynamics of inflation and growth, and the overall comfort from a macro standpoint.
Events like demonetisation, GST notwithstanding, inflation has continued to under whelm both market expectations and the RBI projections.

 Numerically, inflation can move up a bit from now on. But, headline inflation will possible not cross 4 percent till March of 2018 (net of HRA impact) and Core Inflation will hover around 4 percent plus minus 25 bps. RBI has said it will see through HRA impact. While the longer term adherence to the 4 percent number is key, there is a growing sense that a combination of policy and macro related factors will keep inflation lower for longer.

Growth numbers are uneven and we are still looking for new growth drivers beyond government expenditure and consumption. Unless new drivers of growth like private CAPEX, exports or strong rural demand kicks in, growth will remain sub optimal vis a vis potential. Q) At its monetary policy on August 2 RBI reduced repo rate by 25 basis points? Can we expect more reduction in rates in this calendar year? If so…How many more rate cuts?
Tripathi: The RBI retained its neutral stance while cutting rates by 25 bps. The central bank would like to see through the noise around demonetization and GST to assure itself on the sustainability of the recent lower inflation prints. We expect a further easing of 25-50 bps during this financial year, mostly in the 4th quarter of FY18. The driver for these cuts would be continuing comfort from lower inflation prints as well as a possible revisit of the GDP projections.
Q) How are you seeing liquidity in the system panning out? Tripathi: Substantial liquidity got added in the system because of demonetisation. We have seen a reasonable draw down since then. Currency in circulation outstanding is back at Rs 15.5 lakh crore. But there has been additional liquidity added due to a built up in forex reserves. April till date more than $ 15 bln worth of forex reserves have been added which automatically translates in to 1 lakh crore of additional liquidity in the system.

Core system liquidity is close of Rs 3.5 to Rs 4 lakh crores as on date. RBI will keep on absorbing excess system liquidity but given the current growth-inflation dynamics they would be reasonably accommodative there as well. 1-2 percent of NDTL can be a reasonable assumption.

Even after accounting for a potential rise in CAD and higher Credit deposit ratios, core liquidity won't drop below Rs 2 lakh crore by March. So, from a liquidity perspective there is a lot of comfort at the current juncture.
Q) Do you think inflation might be pushed up slightly due to GST impact? Tripathi: GST may not impact CPI adversely, given the current composition of the CPI basket. In fact purely number basis, there can be a small disinflationary impact. It will be at least 3-6  months post which the exact impact will be clear. System debottlenecking will also add to the positives on GST from an inflation standpoint.
Q) In what range are you seeing 10-year trading in the near term? Tripathi: The RBI has delivered a rate cut of 25 bps points and will be data dependant for further monetary policy actions. We expect a 25-50 bps of further easing in the foreseeable future. If terminal repo rate moves lower to 5.50 percent, along with the good liquidity conditions, the 10 year could settle in a range of 6 percent to 6.25 percent.
Q) In terms of corporate bonds do you think there is demand from mutual funds? Tripathi: There is a significant demand for good quality corporate bonds across the system. We have seen a fundamental shift towards higher financial savings off late. A meaningful part of these financial savings have been moved to capital market or capital market related products like mutual funds, insurance vehicles or to different types of retirement funds. Financial assets have also performed well, gold and real estate alternatives have had a poor run off late. All this suggests that the flow would remain healthy. You will see demand for debt assets which includes both G-secs and corporate bonds.  
Q) The recent incidents of credit rating downgrades (Amtek auto and BILT) reflect that MF industry is reactive rather than proactive in managing risks. What needs to be done to mitigate credit risks in debt funds? Do you think MFs should not completely rely on credit rating agencies? Tripathi: Fund houses are already devoting a lot of effort and resources into credit research and structuring. Nearly 50 percent of the debt investment team at RMF is dedicated to this activity. The scale and importance may differ across the industry, but most of the larger players in this space have already taken this view to deploy significant resources here.

Credit / Accrual funds are already core offerings for many MFs. We are in the business of predicting rating migration and not following it. Ratings and interaction with rating agencies is a part of the decision making process, but doesn't substitute it in any manner.
Q)  What are your expectations on the rates of CPs CDs? Tripathi: CP, CD market are impacted more by near term liquidity conditions. Today there is significant amount of surplus liquidity and there is lower issuance specially from banks and from private corporates. Financial services companies, NBFCs and housing finance companies are the predominant issuers along with some private corporates which are replacing there working capital lines with cheaper funding from the capital markets. In fact the monetary policy transmission has been most visible in money markets as rate cuts have been accompanied by better liquidity conditions.

Given favourable demand supply dynamics, additional demand from banks themselves to subscribe to these instruments, we see CDs trading in a range of 25-50 bps above overnight rates, at least during this financial year. Demand is pretty strong and in this kind of demand scenario you will not get too much of spread by investing only in money market instruments that too very short term. We have been advising investors that if you have a view in terms of investing your money for more than 2-3 months you should definitely look outside the liquid fund space or one should look at typically ultra short term funds or short term funds if investments are slightly longer.  
Q)      Any innovative kind of products that Indian MF industry is lacking or Can you think of any innovative product that can be launched in India?

Tripathi: Innovation in the debt market have been lagging in the past few years. In terms of innovation in products, we want to highlight this trend of the liability profile of mutual fund schemes changing from being predominantly institutional focused to now being retail focused. If we look at the current product basket from a retail perspective, we would definitely like to focus more on retirement focused products. We need to give longer term solutions to the retail investor.

For eg : There is no product in India that gives return visibility for next 25-30 years. By simply buying longer tenor G-secs in a dedicated fund, we can give retail investors some visibility on potential returns over longer periods of time.

Areas of product innovation have to be linked to specific needs and goals of retail investors, and any gaps that exist as on date need to be filled in.
10)   What is your advice to investors? Tripathi: Inspite of what looks attractive at any point of time don’t forget to allocate. As long as your allocation to fixed income and equities is proper everything else will take care of itself. 80 percent of time should be spent on allocation and 20 percent in fund selection. If investment horizon is more than 5-7 years then some allocation has to be in equities and if more than 10-15 years, a large part has to be in equities. Equity does wealth creation but debt gives stability of income and meets specific cash flow requirements.

Follow @HimadriBuch