There appears no sign of interest rates falling too soon. The liquidity position too remains tight. What should debt investors do at this juncture?

We caught up with Mr Namdev Chougule, Head – Fixed Income, J.P. Morgan Asset Management India, to get his perspective on debt markets and the right investment opportunities available for retail investors now.

Excerpts:

The bond market did not cheer the rate cut by the RBI with a bond price rally. What could be the reason?

There are multiple reasons for the lack of enthusiasm in the bond market. Crude oil prices are still high. The current account deficit is widening, so funding this deficit remains a challenge.

Depreciation of currency is affecting domestic liquidity. We continue to see fresh supply of government bonds every week.

I would say it is short-term nervousness.

Going forward, I expect the 10-year government bonds will trade in a range which is closer to the repo rate. That means yields will fall.

Why is the liquidity still tight in the system?

The most important reason for the tight liquidity is the rupee depreciation. A dollar outflow and RBI intervention to support the rupee have resulted in tightening the liquidity situation. This is the first structural issue.

High inflation over the last two years has increased the currency in circulation, thereby reducing the money available to the banking sector. This is the second structural issue.

The cyclical issue is that government spending hasn't taken off. We expect they will start spending over the next couple of months. Government spending will ease some liquidity in the domestic market.

Have you toned down your expectations on rate cuts with rising inflationary pressures?

We were expecting close to 100 basis points rate cut over a one-year period. With a 50 basis point rate cut already done, we expect another 25-50 basis point cut in rates in the course of next two to three quarters.

While there is the risk of inflation rising, the RBI is more concerned about growth. What we have seen is that the GDP growth of 7.5 per cent is likely to sustain with the current level of inflation (and under current assumptions of crude prices and the rupee movement).

Our view is that unless India's GDP growth moves above 7.3 to 7.5 per cent, the pressure on inflation is likely to be less.

How do you see the movement in yields across various maturities?

In the short term, the yield curve is expected to steepen as liquidity improves.

The RBI, in its policy, has assured that it will keep liquidity within the comfort zone of plus or minus 1 per cent of the NDTL (time and demand liabilities or deposits).

We expect that the central bank will try and maintain liquidity in the system through cuts in the cash reserve ratio and open market operations (bond buyback). That will keep the shorter end of the yield curve closer to the repo rate.

In the medium term, the curve may flatten once the supply side concerns are over.

Will the recent downgrades of companies limit investment opportunities for the mutual fund sector?

The correct question would be, whether one should bet on the lower-rated bonds compared with investment graded ones. As far as JP Morgan AMC is concerned, we are cautious on credit and we don't intend to play the credit curve on our portfolio.

We will be focussing on companies with sound balance sheets and which have less chances of downgrades.

What category of funds should investors opt for?

We have two funds for different kinds of investors. One is JP Morgan India Short-term Income Fund.

The strategy of this fund is to have steady accrual and at the same time deploy 10 to 20 per cent of the portfolio in the longer duration bonds to capture the movement in a falling interest rate scenario.

This fund is for investors who like to see lesser volatility but at the same time also benefit from the falling interest rates.

There is another fund for investors with higher risk appetite — JP Morgan Active Bond Fund.

The strategy of JP Morgan Active Bond Fund is to purely play longer duration bonds such as 10-year government securities or corporate bonds.

The idea is to bet on the fall in interest rate scenario in the next one to two years as we expect the economy will benefit from lower inflation and a pick-up in growth.

Why has JP Morgan Active Bond Fund been underperforming?

This fund has a small asset size compared with its peer group. The fund strategy could not be implemented properly as the size was miniscule.

What we have done is that we have re-launched this product and are aggressively selling it through our various channels.

We will be selling this fund aggressively in the retail market. We think the retail market is under-penetrated. Most of the time, retail investors favour avenues such as bank deposits.

What kind of funds should individuals invest in to manage better-than-FD returns, going forward?

It will depend on the investor's risk appetite. If the investor is looking for a direct substitute for fixed deposits, then he should look at a slightly stable product such as short-term income funds.

If you have a high risk appetite, consider funds such as income funds, which manage their debt portfolios actively.

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