There is still value in long-term bonds, says Avnish Jain of Canara Robeco MF

Markets are expecting a February rate cut and a shallow rate cut cycle, says Avnish Jain.

On December 6, the Reserve Bank of India (RBI) held the repo rate steady at 6.5 per cent for the 11th consecutive time, but raised hopes that the central bank will go for an interest rate cut in the next Monetary Policy Committee (MPC) meeting in February. At the same time, the RBI cut Cash Reserve Ratio (CRR) to 4 per cent to ease banking system's liquidity deficit.

The RBI policy remained steady with notable changes in inflation forecast being higher than before and growth expectations marked lower.

Avnish Jain, head, fixed income, Canara Robeco Asset Management Company, spoke to Moneycontrol about how he is placed in terms of duration in his debt funds, the calendar year outlook for fixed income and which is a better bet for retail investors — passive debt funds or active funds.

Edited excerpts of the interview:

How do you see the MPC decision, as there was no rate cut but CRR was slashed?

Before the GDP (Gross Domestic Product) numbers for the second quarter (Q2) came out on November 29, it was expected that it will be a status quo by the RBI. The CRR cut was also not anticipated to a large extent at that point of time.

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Only after the GDP number print that came out at 5.4 per cent for Q2 of financial year (FY) 2025, expectations arose in the capital markets that the RBI may be pushed to do a rate cut. If not rate cut, then probably a CRR cut.

If you see, the numbers on credit growth in the past few months, it has dropped to 11-12 per cent. So definitely, there were some liquidity issues. Banks are also not able to lend.

Unfortunately, on the other side, the inflation numbers have been printing higher after August. This was mainly due to food prices. Obviously, the RBI took cognizant of high inflation numbers, and that the growth should bottom out now.

These two major changes point to the RBI's reluctance on looking for a rate cut. With liquidity being a bit on lower side, the RBI going to neutral stance in October, they need to maintain liquidity at a reasonable level. They cut CRR by 50 basis points (bps), injecting approximately Rs 1.16 lakh crore into the system in tranches in December.

What’s your outlook on the rate front for 2025?

Markets are expecting a February rate cut and a shallow rate cut cycle, probably 50 bps over February and April. The central bank would be looking at the evolving conditions. Indian currency has also been bit under pressure. This could have also played some part in calculations of the RBI.

All these factors put together, the RBI took a decision that they will not do anything apart from cutting CRR to alleviate the liquidity conditions.

I think the first-rate cut will happen in February. Again, it'll depend on what inflation number prints are for November and December.

The US Federal Reserve is also expected to make a 25 bps cut in December policy meet. While the US growth has been slightly on the stronger side, inflation has been tempering down, but it has become sticky.

To that extent policies are becoming more data driven because surprises are still there even after moderating inflation.

What is the duration positioning of your debt fund portfolios? Has the latest policy update brought any changes?

Not really. From the start of this financial year, yields have actually dropped. We saw around 10-benchmark yield at 7.25-7.40 per cent in the first quarter (Q1) of FY25, they around 6.75-6.70 kind of levels in the recent past. Overall, without rate cut, yields have eased. We have been on slightly higher duration for some time.

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Key thing is that in case inflation rate remains a little tighter or sticky, the RBI may not cut rates to the extent market is expecting.

But the central bank has shifted to neutral stance, which clearly points out to their confidence that these numbers are temporary, and the inflation should come down. On the duration funds, we are on higher side.

For some time now, consensus has been on betting long bond yields. Does this view still hold true?

In Q2, insurance companies are expected to get a lot of money through premium plans for the year- end considerations. There will generally be a good demand for long-term papers. We anticipate that the spreads would contract. There is still value in long-term bonds.

Do you think the market is conducive to a higher credit risk?

We as a fund house have been staying away from credit risk. Our total portfolio is triple AAA right now, with some bit going down to AA+.

What are the emerging trends and key projections?

Market yields are trending lower. But how fast or how slow that is going to happen with what volatility is depends on the data which comes in.

In the US, we have seen huge volatility from 3.60 per cent to 4.40 per cent and now 4.15 per cent. The US market is extremely volatile.

Altogether, the market is skewed towards dollar strengthening, which has led to depreciation of currencies across the world.

After getting large flows from the inclusion of Indian bonds in the JP Morgan index, flows have slowed down in the past two months. We anticipate that in January also, there is addition of Indian bonds in the Bloomberg index, which will bring in $3-4 billion into Indian bonds. From that angle, bond markets should be positive from 2025 perspective as well.

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I don't see any sharp upward movement in yields here as markets have been fairly rangebound this year with a downward bias.

There's a major debate happening on active versus passive in equity funds. How do you see this playing out in the debt fund side?

From the expense perspective, debt funds don't have very high expenses compared to equities. Typically, when we look at various passive indices, we may not invest in all the papers which are in the indices. Fund managers may try to proxy the indices by around 70-80 per cent. Tracking errors maybe slightly larger.

Also, if you look at credit side also similar-rated companies does not mean that every company is similarly safe as well. In active funds fund manager should be comfortable with both the paper taking and the duration call.

Earlier, passive debt funds came into prominence because of tax advantages, which has since been done away with. To that sense, investors would be better in an active bond fund, where there is possibility of higher alpha.