Mr Akhil Mittal

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?

After witnessing a deep 200 bps easing cycle from RBI, wherein the 10-year benchmark yield fell from 9.10% in Jan 2014 to 6.20% in December 2016, the yields saw a hardening bias till April 2017, wherein the 10-year benchmark yield touched 6.98%. This can be attributed to change in monetary policy stance from accommodative to neutral by RBI in Feb 2017. Post that, the headline inflation (CPI) fell sharply to 1.54% in June 2017, much below RBI expected inflation target, leading to 25 bps rate cut by RBI. This saw 10-year benchmark yield fall to 6.41% by July 2017.

However, post July 2017, inflation has been inching up and last recorded a high of 4.88% in December 2017. This has led to an expectation of end of rate cut cycle, with some market participants not ruling out a rate hike in 2018 calendar year. In its objective to reduce surplus liquidity from banking system, RBI did OMO sales of government securities to the extent of INR 900 bn. This exerted pressure on yields. Also, there have been increasing concerns over the government's likelihood of meeting its fiscal deficit target, as there has been a significant shortfall in revenue collections of the government while expenditures are tracking ahead of budget estimates. With likelihood of breach of fiscal deficit target, there is a possibility of further borrowing by government. All these factors put together, have led to significant hardening of yields. 10-year benchmark yield has reached a level of 7.30% as of 22^nd December.

Going ahead, we expect yields to remain range bound and witness a sideways movement till there is a clarity on Fiscal management by government, trajectory of inflation, especially with regards to crude prices, and GDP growth (a higher GDP growth will reduce any chances of rate cut). Market will look ahead to budget and we do not expect any major change in yields till then. For now, we expect 10-year benchmark yields to remain in range of 7.10% to 7.40%.

2. After the RBI policy rate status quo, where do you see the bond yield moving (long-term bond yields and short-term bond yields both)

In its last monetary policy review, RBI kept key rates unchanged and signaled a cautious bias on rising inflation and uncertainty on fiscal. RBI also moved its expected inflation trajectory upwards for March 2018. This led to hardening of yields post policy review. With crude prices remaining high, and volatile food component still showing upward pressure on prices, there is a likelihood of inflation print recording higher than RBI expected trajectory. With base effect also coming into play, we expect inflation for month of December to inch up beyond 5%, thereby putting further pressure on yields. With RBI removing surplus liquidity from system and moving towards neutrality, we believe even short term rates will come under pressure and entire yield curve shifting upwards.

3. CPI and WPI have been inching up. Where do you see them heading? Why?

Both CPI and WPI have been inching upwards since June 2017. From a low of 1.54% in June 2017, CPI has moved sharply up to 4.88% in December 2017. WPI has also moved up from low of 0.90% in June 17 to 3.93% in December 2017. High crude prices, rising services inflation (education and medical), hike in HRA by central government and some state governments, and higher food prices led to sharp increase in both measures of inflation. Going ahead, we expect inflation to remain in higher trajectory. With crude prices expected to remain high, and no respite expected in food prices, there isn't much scope for inflation to come down. Also with more states expected to hike HRA, there would be statistical rise in inflation gauge. If government also decides to deviate from fiscal consolidation and adopts an expansionary mode to boost growth, it might also add to generalized inflation. Given the base effect coming into play, we expect inflation to move beyond 5% in December 2017 and peak in June 2018 within 5% - 5.50%. Thereafter we expect inflation to come down and move closer to RBI medium term target of 4% by March 2019.

4. What measures RBI will take to control inflation? What will be its impact on yields?

Within the monetary policy framework, RBI has only Repo Rate as a tool to manage inflation. If inflation moves higher than RBI expected trajectory and is expected to remain there, RBI can hike repo rate to meet its medium-term target. Prima facie, this will have an adverse impact on yields and we might see an upward shift in entire yield curve. However, the magnitude of rise in yields will be a function on how much rate hike RBI would be expected to do. For instance, if one expects RBI to hike only by 25 bps to meet its target, we would expect yields to move up by 20-25 bps only. If there is an expectation of further rate hikes, then yields would move much more.

5. What is the ideal time frame which an investor should look at while investing in bond funds in current markets?

In current markets, an investor looking to invest in bond funds or long duration funds should have a long term holding horizon (2-3 years) for making reasonable returns. With uncertainties hovering around macro indicators, there is low near term possibility of easing. This would mean that any capital gain opportunity from downward movement in yields would take longer to realise. Hence, investors need to have longer holding horizon for investing in bond funds.

6. What is your strategy for short term funds? What is your exposure to long term funds and why?

Tata Short Term bond fund aims to generate regular accruals through investments in high credit quality debt and generate capital gains from fall in interest rates. The average maturity of the fund has been in range of 2 years to 3 years in recent past given the easing monetary policy cycle. However, with inflation inching up and monetary policy cycle expected to be on pause mode for foreseeable time, we are currently cautious on duration. We have positioned the portfolio more towards regular accruals and lesser towards achieving capital gains from duration.

7. What's your investment strategy?

We follow a philosophy of SLR in managing our Fixed Income Portfolio's where S for Safety, L for Liquidity and R for Returns is the guiding principle. We maintain high credit quality in our portfolios and do not go down the credit curve. This ensures safety of capital of investors. While allocating the portfolio, we maintain ample liquidity to ensure swift change is possible in case of change of stance / events. Returns are envisaged to be generated in line with objectives of the scheme and risk is contained in the process

8. How often do you re-balance your debt allocation?

We keep a close watch on markets and our portfolios. In case any event / occurrence in the market requires a change in stance, or any developments wherein our views have changed, we rebalance our debt allocation on real time basis. This is a continuous process and not dependent on period / pre-specified date.

However, we have formal process of discussions / market update and forming a view on markets. We do this through Investments Committee meeting / Debt Investment Committee meeting, which happens periodically

9. What is your advice to the investors?

We would ask investors to stay invested for a longer time period and choose product category depending upon their risk appetite. If one has greater appetite for risk and longer holding horizon, long duration funds could be considered, whereas for investors with shorter investment horizon and / or lower risk appetite, short duration funds could be considered.

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