Interview Excerpts of Raghupathi Acharya - NAV India
In an interview with Capital Market, Raghupathi Acharya, Senior Fund Manager - Fixed Income, Tata Mutual Fund said, "We remained overweight on the sovereign bonds in the last 12 months, though we increased exposure to corporate bonds in the month of March as the spreads looked attractive. At the moment, we are overweight on the medium term segment of the yield curve, which is likely to benefit from improved liquidity."
Published on: Mar 3, 2016
Transcripts - Interview Excerpts of Raghupathi Acharya - NAV India
Interview with Fund Managers
04 May 2015 13:59
Given our outlook on inflation, we believe that the RBI is likely to cut the policy rates by 25
bps by June and possibly by another 25 bps by Septembe
Raghupathi Acharya, Senior Fund Manager - Fixed Income, Tata Mutual Fund
In an interview with Capital Market, Raghupathi Acharya, Senior
Fund Manager - Fixed Income, Tata Mutual Fund said, "We
remained overweight on the sovereign bonds in the last 12
months, though we increased exposure to corporate bonds in the
month of March as the spreads looked attractive. At the moment,
we are overweight on the medium term segment of the yield
curve, which is likely to benefit from improved liquidity."
1. What are your views on fixed income market? How have
the yields moved and which direction you see them moving
in near to mid-term and why? What will the key driving factors for yields?
Fixed Income markets have performed exceedingly well in the last 12 months. The easing inflation and
consequent cut in policy rates by RBI helped the yields to fall across the curve. The 10 year yield eased
by as much as 100 bps in the last 12 months. The inflation which had averaged around 10% in 2013
witnessed a secular softening bias during 2014, to average at 7.2% in 2014, with latest inflation print
coming at 5.17% for the month of Mar-2015. The lower than expected inflation has been enabled by
the sharper decline in prices of vegetables and fruits since September, ebbing price pressures in
respect of cereals and the large fall in international commodity prices, particularly crude oil. In line
with falling headline inflation, the inflation expectations too have moderated significantly. Households'
inflation expectations, both near-term and longer-term inflation expectations have eased to single
digits for the first time since September 2009. As a result of this, RBI cut the policy rates by 25 bps
each in the month of January and March 2015.
Going forward, a conflux of benign commodity prices, expected improvement in quality of government
spending is expected to keep CPI inflation well within the comfortable range 5-5.5% in FY16. RBI has
kept a target of 6% inflation by Jan-16 and we believe that his would be comfortably over-achieved
by 50 bps paving way for another 25 bps rate cut by June- 15, with the possibility of an additional 25
bps cut by Sep-15 if oil prices continue to remain soft and 2015 south-west monsoon remains normal.
A sustainable decline in inflation, rupee stability and commitment to fiscal consolidation amid a rate
easing cycle is supportive of bonds. Besides, we also foresee enhancement in the FII limits for g-sec
by another USD 5bn, as the same has nearly been exhausted as of date. All these factors should drive
the yields lower, with 10 year benchmark g-sec yield to gradually grind lower to the region of 7-7.25%
in the medium term.
2. What is your strategy for short term funds? What is your exposure to long term funds
Short Term Bond Fund is managed and positioned as an ‘All Seasons Bond Fund' and is suitable for
investment irrespective of direction of interest rates. The fund predominantly runs an accrual strategy
with duration around 2 Year with the objective of capturing short term accrual yields. More than 2/3rd
Mr. Raghupathi Acharya
of portfolio is invested in high quality debt securities up to 3yrs maturity. While fund do not take
aggressive credit calls, restricting investment only in high quality papers, the fund at times does takes
tactical exposure to medium/long duration corporate bonds/sovereign bonds of above 3Yrs to benefit
from opportunities at the long end of the interest rate curve. Overall, the investment strategy revolves
around our core philosophy of SLR – Safety of investments, adequate liquidity of the portfolio and
optimal returns in line with the fund's risk profile.
3. Kindly share your views on recently falling inflation? Is there possibility of inflation
Both the CPI and WPI inflation trends present a benign picture as of now. While the weak global growth
has kept the input prices kept low in turn helping the WPI inflation to remain in negative territory for
the last 5 months, the CPI inflation too has managed to tread the indicative path of the RBI. The CPI
inflation is likely to moderate gradually to around 4% level by August, but firming up there after to
around 5.5-5.75% by March 2016. Despite the concerns on intensification of El Nino weather condition
impacting monsoon this year from a few quarters, private weather forecasters (Skymet) have
forecasted an above normal monsoon this year. If this indeed is the case, then the inflation could
surprise on the downside as well.
4. When do you expect the RBI to cut the policy rates again and why?
RBI in its April policy, maintained that the accommodative stance of the monetary policy will be
maintained, but the same will depend on various factors, key among them, the transmission by banks
of its front loaded rate reduction, the impact of recent weather related disturbances on inflation and
the monsoon situation. While many of the large banks have started passing on the benefit of rate cut,
albeit partially, the impact of weather related inflation has not been seen so far. Regarding the
monsoon, weather scientists from the US, Japan and Europe expect monsoon rainfall to be normal this
year. In fact one of the private forecaster, Skymet has predicted above average rainfall this year,
which should augur well for inflation situation in the country. Given our outlook on inflation, which is
expected to average around 5-5.5% in FY16, we believe that the RBI is likely to cut the policy rates
by 25 bps by June and possibly by another 25 bps by September.
5. If the interest rates fall from here what will be your strategy for debt funds?
We remained overweight on the sovereign bonds in the last 12 months, though we increased exposure
to corporate bonds in the month of March as the spreads looked attractive. Within the sovereign bond
space, we constantly look for opportunities for mispriced assets on the yield curve. At the moment,
we are overweight on the medium term segment of the yield curve, which is likely to benefit from
improved liquidity. We would closely watch the extent of disinflation in the economy and the monsoon
situation. . If the present disinflation trajectory continues and monsoon turns out to be normal, we
would again look to increase the duration, betting deeper cuts in the policy rates than what is currently
6. What is your advice to the investors?
For investors with low appetite for risk, with a short investment horizon we would suggest ultra short
term debt funds, while for an investor with moderate risk appetite and has a minimum investment
horizon for 6-12 months, we recommend short term bond funds, as they provide stable returns with
scope for capital gains. For an investor with an investment horizon of 1-3 years, with an appetite for
higher risk, we would suggest long duration funds, like Income/Dynamic and Gilt funds, which provide
good capital appreciation opportunities. However investor should keep in mind that, returns from these
funds may remain volatile and investor should ride out these volatilities to gain from the falling interest
rates that we expect in the medium term.
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