Any unfavourable Lok Sabha election outcome to pressurise fiscal deficit & currency: JM Financial MF's Gurvinder Singh Wasan
"We expect continuity of a range-bound movement in Rupee unless the central bank is forced to intervene to manage extreme volatility due to lumpy flows from off-shore participants," says the fund manager.
The reaction in the bond market is only likely to the extent that if the state election results do not favour the existing ruling party, there would be more inclination towards populist measures towards the Lok Sabha elections, pressurising fiscal deficit and currency.
"Anyways, we believe there are other important parameters to track (global yields, currency, growth-inflation dynamics, demand/supply trajectory, etc.) that could influence the fixed income market, and we would continue to make our hypothesis based on those," says Gurvinder Singh Wasan, CFA, Senior Fund Manager and Credit Analyst, Debt, JM Financial Asset Management Ltd, in an exclusive e-mail interview with Zee Business' Roshni Agarwal.
Wasan is a CFA and CA by qualification with 18 years of rich experience in the fixed-income market. His forte is in the area of fund management and as a credit analyst.
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Q1. Now that the Federal Reserve hasn't indicated any rate cuts as inflation in the US still remains above target, how do you see the US Fed's stance impacting the debt market globally as well as in India?
We believe the business and economic cycles in the US and India vary from each other, complicating the RBI’s task. For now, we understand that the dilemma with the FED is that a) there are nearly equal risks of raising its benchmark rate too high, which could derail the economy (given that there seems to have been a softening in the economy as per recent month’s data—consumers are under pressure and businesses are cautious), or b) not raising it high enough, which could allow inflation to persist or worsen (despite the recent softening of the Consumer Price Index (CPI), core inflation remains fairly high).
The macroenvironment remains fluid and challenging. On one hand, the debt market in the US is factoring in rate cuts to begin in the 2nd half of 2024, resulting in a recent rally in bond yields. There is a risk that bond yields may remain under pressure due to a high run rate of fiscal deficit in the US, which may result in a higher run rate of sovereign supply, but the proportionate demand (from foreign buyers such as China, Japan, etc., and the Fed itself being in quantitative tightening mode) may not be adequate.
The question for debt market participants is whether to view the recent ten-year rally in the United States as a small bull market rally in a long bear market. Is it possible that the Fed cuts rates eventually but bond yields remain higher due to demand-supply dynamics?
Given the uncertainty mentioned above, our takeaways domestically are: The business and economic cycle in India are different, with growth looking resilient and inflation likely to remain higher than targeted.
The important assumption that rates would remain higher for longer globally, which is one of the three hypotheses of the RBI (the other two being domestic GDP growth rate is resilient and domestic inflation is still not visible to be near 4% on sustainable basis), should continue to mean that in the visible future, rate cuts are not likely to happen.
If the RBI continues to keep systemic liquidity in a tightening mode with no rate cuts visible, bond yields may not have a run-away rally. At the same time, bond yields may go up if global rates head higher, pressurising the currency, but they may get capped as the demand-supply dynamics (unlike in the US) are favourable in India due to its inclusion in the global bond indices.
We see a broader range-bound movement of yields in India, and most investors will continue to be broadly neutral in duration and focussed on carry trades going forward.
Q2. How do you see the bond yield curve to be as crude prices are on a declining trend, thus easing inflation worries to some extent?
Crude prices remain an important element for tracking inflation. However, whether the recent correction in crude prices is structural or whether the bounce back higher is the way forward is anyone’s guess. What the RBI has been talking about is that the risk of inflation continues to come from food-related components, which are a combination of weather-related disruptions and political will to manage them.
The bond yield curve has remained flattish for a while now as tighter liquidity has put a floor on the shorter end of the curve, while better demand from real money investors has kept a cap on the longer end of the curve. We believe this will remain so unless there is a change in stance towards easing out the system's liquidity or we get into a structural bear market globally, pressurising the longer end of the curve to head higher.
Q3. Lok Sabha elections will be the next big event for domestic markets. How do you see it impacting the fixed-income market?
The reaction in the bond market is only likely to the extent that if the state election results do not favour the existing ruling party, there would be more inclination towards populist measures towards the Lok Sabha elections, pressurising fiscal deficit and currency. Anyways, we believe there are other important parameters to track (global yields, currency, growth-inflation dynamics, demand/supply trajectory, etc.) that could influence the fixed income market, and we will continue to base our hypothesis on those.
Q4. What will be your investment advice to investors in the debt market given the global headwinds and environment in the domestic markets?
While the current rate looks attractive across the curve, we prefer staggering investments over the next two quarters as a reasonable way to build the portfolio and duration.
The genesis of the entire investment philosophy is balancing asset allocation and staggering investments. After 250–300 basis points of interest rate reset and the benchmark yield being available at an attractive yield of around 7.25, we would not advise a zero per cent allocation to long-term debt currently.
However, at the same time, the allocation is not recommended to be 100 percent as well. Hence, one should stagger it over the next two quarters or so. Instead of targeting a particular segment of the curve, investors should allocate funds to different maturities based on their investment goals and risk appetite.
Q5. The rupee has been on a losing spree. What is your view on it?
Currency movements are a relative trade. While the rupee has recently depreciated, it has outperformed some of the other currencies versus the dollar on a year-to-date basis. We expect continuity of a range-bound movement unless the central bank is forced to intervene to manage extreme volatility due to lumpy flows from off-shore participants.
Q6. JP Morgan has added India to its Global Government Bond Index-Emerging Markets (GBI-EM) global index suite, and Indian sovereign bond inclusion is also being considered in the Bloomberg Fixed Income Index. So what kind of impact will it have on India's debt market?
The sovereign part of the curve has already factored to some extent the inclusion and the potential inclusion in the index. However, now that the schedule of inclusion is known for the GBI-EM index, this could put a cap on the yields going forward. Beyond this technical factor, fundamentals might continue to drive the bond markets, which could be a mix of global yields, currencies, commodities, inflation, fiscal deficits, etc. However, the positive overhang of potential inflows and demand because of the inclusion impact may continue to mitigate adverse factors.
Q7. If we just compare the m-o-m inflow, October saw a net inflow in the debt fund category after seeing substantial outflows in the previous month. How do you see the category performing going through FY24? What, as per you, propelled a huge-scale investment in liquid funds?
The m-o-m inflow of October’23 is largely due to quarterly phenomena, as the previous month of September was a quarter-end. Typically, at the end of every quarter, large outflows are seen from the institutional segment in the liquid fund segment, which tend to come back at the beginning of the quarter. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.