Resource id #11Resource id #11 Fund Manager Interview
24 February, 2018 08:06 IST
Fund Manager

Dynamically managed duration funds will provide better returns: Puneet Pal

Source: IRIS (23 December 2015)

Dynamically managed duration funds will provide better returns: Puneet Pal
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Puneet Pal, head fixed income, BNP Paribas Mutual Fund, said the dynamically managed duration funds will provide better returns for the investors given interest rates are falling. "In such a scenario, we recommend income as well as Gilt funds."

In an interview with Sourabh Pandhare, Puneet Pal said the 10 year G-sec as well as long term yields will come down by close to 50-75 basis points in 2016. He expects the RBI will ease key policy rates by 25 basis points in 2016.

Interview Excerpts:

1. Foreign investors have pumped nearly $11 billion in the Indian bond markets in 2015. Do you think India is the best place for foreign investors to remain bullish on debt markets in 2016?

India remains to be a good place to invest for foreign investors given improved macro - economic fundamentals over the past 2 years, stable government with an eye to remove structural bottlenecks to kick start the economic growth, inflationary pressures in check and rupee's out-performance year to date as against the emerging market peers.

This coupled with Reserve bank of India's commitment for accommodative stance bodes well for the debt markets in 2016.

2. In money market, call money, REPO, and CBLO daily rates moved daily rates average moved southwards over the last 6 months. Will money market rates fall further in near-term? How do you see outlook for money market rates in 2016?

Money market rates are a function of the overall banking system liquidity as well as the Operational rate i.e. the repo rate. The money market rates have come down in the last 6 months owing to repo rate cuts by the RBI.

Going forward, we feel that RBI will take care of the Liquidity in the banking system through the use of various liquidity tools (daily Liquidity adjustment facility / Variable Term repos / Open market operations / FX intervention). The RBI has committed its accommodative stance provided Inflation is within its targeted range. We feel that inflation will be in line with RBI's assessment and thus with further fall in repo rates, the money market rates will adjust accordingly.

3. During the last one year, 10-year benchmark G-Sec yield dropped from over 8% to 7.70-7.80% now. How do you see movement of 10-year G-Sec yield in near-term? How do you see outlook on long-term yields in 2016?

Currently, the ten year is very attractively valued given its spread to the operational rate (repo rate). Historically, the spread between the Repo rate and 10 year G-sec has been around 55 bps as against current 100 bps. This with our expectation of inflation falling in line with the RBI's target for FY-2017, we feel there is a scope of 25 bps rate cuts in 2016. However, there are some concerns on the fiscal front with 7th pay commission recommendations as well slowing economic growth. Still, we believe the 10 year G-sec as well as long term yields to come down by close to 50-75 bps in 2016.

4. In currency markets, rupee has depreciated by 6.4% against US dollar in last one year to 67-level. Do you think, rupee will cross level of 70 against dollar in the next year?

Given, the improved macro - economic fundamentals, relative out - performance of India as an investment destination against other emerging market peers and government's proposed structural reforms supporting growth and reducing long drawn supply bottlenecks. We feel the Rupee should be in the range of 66-68 for 2016.

5. Favourable inflation has provided RBI room to lower interest rates by 125 basis points in 2015. Meanwhile, industrial production growth was positive with volatile movement in this year. In this light, how do you see outlook on growth, inflation and monetary policy in 2016?

Generally it takes around 4-5 quarters for the impact of rate cuts to seep into the economy, thus we feel that impact should start showing in economic data and activity in next 2 quarters. The improving US economic outlook should counter- balance the slowing Eurozone.

Inflation should be in the range of 5.25-5.50% for FY 2016. Government's efficient supply side management for food as well as lower oil prices support our view.
We expect the RBI to ease by 25 bps in 2016.

6. What category of debt funds offer opportunity when interest rates are falling?

Ideally the dynamically managed duration funds will provide better returns for the investors given interest rates are falling. Thus in such a scenario, we recommend income as well as Gilt funds.

7. What is your advice to investors in the Indian debt markets at this juncture?

Given better macro - economic fundamentals, stable political environment and Central banker''s commitment towards further accommodation bias. The attractive levels of Sovereign yield curve with our expectation of 25 bps expectation of rate cuts in 2016, we advise BNP Paribas Short Term Income Fund for low risk profile and BNP Paribas Flexi Debt Fund for high risk profile.

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