Bekxy Kuriakose, Head- Fixed Income, Principal Mutual Fund said the expected rate hike by the US Federal Reserve this year may not impact the Indian bond markets adversely. 'US treasuries have factored in hike expectations to some extent in the past couple of months and to that extent our markets have reacted as well,' Kuriakose said.

In an interview with Sourabh Pandhare, Bekxy Kuriakose advised bond investors to increase exposure to duration funds post the fall in gilt prices in early June.

Interview Excerpts:

1. Consumer and wholesale price fell sharply during July to 3.78% and negative 4.05% respectively. Do you think steep fall in inflation will provide room for the RBI to reduce key interest rates?
Yes, the probability of RBI cutting key rates in September Monetary Policy Review has increased.

2. The US dollar has strengthened after China announced yuan devaluation. However, the stronger dollar pushed rupee below 65-level to over two-year low. Is fall in rupee excessive? Do you think rupee will bounce back soon?
Typically when an unexpected event like this (yuan devaluation) happens there would be a kneejerk sharp movement and moreover rupee depreciation has been in line with other Asian peers. Hence in a sense we cannot be immune to currency movements happening in our region and around the world. However, key factors which are positive for our currency are falling commodity prices, benign inflation and expectation of further rate cuts.

3. The US Federal Reserve is expected to raise interest rates in this year (probably in September). According to you, what is the possible implication of Fed move on Indian bond markets?
I think the impact may not be as adverse as some think. Firstly US treasuries have factored in hike expectations to some extent in the past couple of months and to that extent our markets have reacted as well. A key positive for India is the declining inflation differentials with the latest CPI printing at below 4% as compared to far higher levels a year back. This bodes well for declining interest rate differentials. In other words, this time around even with a Fed rate hike its possible Indian interest rates can decline further from current levels.

4. The 10-year benchmark yield stood at 7.74% as on August 14, down 19 bps and 81 bps over the last 3 months and 1-year. Going forward, how do you see the movement of 10-year benchmark in next couple of months?
The 10-year benchmark can decline by another 10 to 20 bps if RBI carries further rate cuts and inflation continues to remain benign. Opening up of FII limits for investment in government securities can be an added booster.

5. Money market rates fell during the last one month. Will the fall in the short-term rates continue?
Yes, it's possible especially if there is a rate cut. Else we expect rates to remain range bound going forward.

6. Indirect tax collections jumped 37.6% during April-July 2015 to Rs 2,104.55 billion. Do you think sharp increase in indirect tax collections would have implication for FY16 government borrowing and bond markets?
It's too early to comment on government borrowing programme based on only one figure. There are several other key revenue and capital receipts (for eg divestment) heads which need to be achieved before government can think of reducing the borrowing programme.

7. Is bond market attractive enough for investors? What retail investors should do in current market conditions?
We have been advocating bond investors to increase exposure to duration funds post the fall in gilt prices in early June. Since then yields have already fallen by 15-20 bps. Those who are underinvested in duration funds can still look to add.