As the Reserve Bank cut its policy repo rate by 0.25 per cent a few days ago, there was no major celebration on bond street. The cut already seemed to be factored in by the markets. For debt fund investors, this is a matter of importance. As of now, two differing views are emerging. The first one is that the best of bond market gains may be over. The second view is that bond markets are likely to do well, and the best is probably yet to come. Value Research spoke with debt fund managers to understand their logic.
Arvind Chari from Quantum MF is confident that we may have just seen the last rate cut in this cycle and the RBI is likely to keep rate on hold for some months as we expect CPI to rise above the 4% mark by Q1 2018. This prognosis has ramifications for bond market. So, how will bond yields trade? Nagarajan Murthy, Head-Fixed Income, Tata Asset Management said: "We expect 10-year Government Bond yields to trade between 6.30 % to 6.45 % in the coming months." As that is pretty close to current levels, it indicates limited upside for gilt prices from here.
Many debt market experts feel that going ahead, interest rates on short term debt instruments might trend lower by 15-20 bps, in line with the lower repo rate. On the other hand, yields and expected returns on liquid and short term bond funds might reduce marginally.
Nays
However, not everyone agrees that bond market gains from here on will be limited. Avnish Jain, Head - Fixed Income, Canara Robeco Mutual Fund is of the opinion that the returns from bond markets should be seen in context of current nominal rates and relative to returns from competing fixed income products. "In a scenario of moderate growth and low inflation, there is room for rates to go down further. We believe that debt funds are likely to deliver superior risk-adjusted returns in years to come," feels Jain.
Mahendra Jajoo, Head- Fixed Income, Mirae Asset MF asks: "We remain optimistic and constructive on fixed income markets. With ongoing structural improvement in India macro, no pre-emptive view should be taken on how much better things can get."
Jajoo feels fixed income MF investors would do well to focus on keeping a vigil on developing trends and incoming data. "As such, we believe one should still remain invested in bonds," he maintained.
Marzaban Irani, fund manager - debt at LIC MF talks about the backdrop to RBI's monetary policy in the last few meetings.
A lot of concerns that RBI had at the time of previous policy meet, such as sticky core inflation, GST implementation, monsoon, rising rural wages and the impact of HRA hike of Central Government employees seems to have dissipated in the last two months. As a result, the MPC decided to cut policy rates by 25 bps in the August policy.
"However, going ahead, the adverse impact of the farm loan waivers on the combined deficit situation and its impact on the inflation need to be watched more closely. Also the headline CPI inflation has bottomed out at around 1.5% and from hereon, the same is expected to inch upwards in the second half. Even the MPC is unsure of how much disinflation is transitory versus structural," points out Irani.
Besides, the suitable real interest rate as mentioned by deputy governor Viral Acharya is around 1.75%, and "given this thinking, the scope of further monetary accommodation remains far and few," says Irani.
Bekxy Kuriakose, Head - Fixed Income, Principal Pnb Asset Management Company admits that interest rates have secularly declined over past couple of years and a similar fall may not accrue in the coming years. However, she says that investors must not change their strategy. "It would still make sense for MF investors to remain invested in debt funds, particularly duration funds, in the current benign global and domestic macro environment," she added.
Clearly, we have not seen the end of this argument yet.
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