High yields are attraction point for foreign investors to invest in India, according to Akhil Mittal, senior fund manager, Tata Mutual Fund. He believes India will continue to remain preferred investment destination for investors looking to invest in emerging markets in 2016.
In an interview with Sourabh Pandhare, Akhil Mittal said, 'Investors with higher risk appetite and longer holding horizon can look to invest in long term funds with higher duration whereas investors with lower risk appetite and lower investment can look at short term funds.'
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 is better positioned amongst other EM''s as far as macro-economic indicators are concerned. Low and stable inflation, contained fiscal deficit, low current account deficit and stable currency are major positives for India. High yields are also an attraction point for FII's to invest in India. On this premise, I believe India will continue to remain preferred investment destination for investors looking to invest in emerging markets (EMs) 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?
Overnight and near term money market rates are determined by RBI LAF rates and liquidity in the system. With RBI reducing key rates by 75 bps since June, the money market rates have followed the trend. RBI has also managed liquidity quiet actively and maintained comfortable levels in the system. Hence short term money market rates have followed the repo rate moves by RBI. Going ahead, we believe that money market rates will follow RBI repo rate move as RBI is expected to maintain liquidity at comfortable levels.
3. During the last one year, 10-year benchmark G-Sec yield dropped from over 8% to near 7.8% 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?
During last 1 year, RBI has reduced rates by 125 bps whereas 10yr benchmark g-sec yield has dropped by only 20 bps. The main reasons for limited move were global events (Federal Reserve rate hike, Greece concerns, China currency devaluation etc) over last 1 year. Domestically, low deposit creation in banking system has also resulted in limited appetite for g-secs by banking system. As a result, the fall in repo rate has not translated into similar fall in yields.
Going ahead, we believe that g-sec yields should come down as supply falls in 4QFY16 and demand kicks-in both from domestic buyers and FPI's. We believe that CPI index by March 2016 should be below RBI target of 5.8%, which should create further room for easing by RBI. We think 10yr benchmark g-sec yield should fall below 7.5% by March 2016
Having said this, we still believe that RBI would wait to see fiscal discipline by government thus wait for budget, and access inflationary trajectory before acting further. Hence we see a low probability for further rate cuts by RBI in FY16. Looking ahead, we believe there would be space for further easing by RBI to the extent of 50 bps in FY17 as we see CPI index falling to 5%. This would be positive for interest rates and we expect 10 year benchmark g-sec yields to fall to 7% by end of FY17.
Moreover, as we move ahead in monetary policy, there would be limited space for easing and investors would start looking at terminal end to easing cycle. This would lead to higher term premium for longer duration risk. So yield curve is expected to steepen going ahead.
4. In currency markets, rupee has depreciated by 5% against US dollar in last one year to 66-level. Do you think, rupee will cross level of 70 against dollar in the next year?
INR has been one of the better performing currencies during last 1 year amongst EM group, wherein we have seen currencies depreciating from 10% to 30% in last 1 year. Strong macro-economic fundamentals have helped here. Going ahead, for next year also, we believe that same performance would follow. As far as absolute levels are concerned, we think INR could depreciate by 5% to 7% in 2016. By those numbers, there is a high probability that we might see INR at 70 levels against dollar.
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?
We believe that growth should pick up slightly in 2016 as effects of 7th pay commission are expected to boost consumption. We see GDP growth in range of 7-7.5% in FY17. As far as inflation is concerned, we believe that CPI index should be around 5.5% by March 2016, against RBI target of 5.8%. Going ahead, for FY17, we see inflation (CPI index) at 5% as global commodity and crude prices are expected to remain low, and no major demand side pressure being built. On this premise, we see a space of 50-75 bps getting created in monetary policy for further easing. Hence we feel RBI should reduce key rates by 50-75 bps in FY17. The caveat over here would be fiscal discipline path by government. In case fiscal policy is not adhered to, RBI might not be in a position to cut rates.
6. What category of debt funds offer opportunity when interest rates are falling?
Duration funds offer an opportunity to make capital gains in falling interest rate environment. There are varied types of duration funds from Short Term to Long Term Funds having different duration features.
7. What is your advice to investors in the Indian debt markets at this juncture?
With our outlook on interest rates and markets, we would advice investors to invest in debt funds depending on interest rate risk appetite and investment horizon. Investors with higher risk appetite and longer holding horizon can look to invest in long term funds with higher duration whereas investors with lower risk appetite and lower investment can look at short term funds.
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.
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