Mr. Shriram Ramanathan
Head of Investments for Fixed Income and Fund Manager, L&T Mutual Fund
Q. What is your impact analysis on the latest Bi-monthly monetary policy meet?
Answer: RBI Monetary Policy Committee (MPC) maintained status quo with a 6-0 unanimous vote, both on policy rate and on its accommodative stance. While the bond market was not expecting a rate move at this policy, there were some worries about the possibility of a stance change to neutral.
Overall, the MPC statement can clearly be seen as fairly dovish versus market expectations, especially given that the 6 member MPC’s reaction function to CPI being above 7%, was not clearly known before this MPC. The policy would give a fair amount of comfort to the market, that rather than just the headline CPI, the committee is focused on the underlying drivers of inﬂation and that demand side worries are still unfounded at a time when growth is so anaemic.
The real action was much more in the accompanying “statement on Development and Regulatory Policies”, which had some huge impactful announcements. Taking off from where the Union Budget had left off, the RBI has taken several well-targeted initiatives to impart a positive stimulus to growth.
Most importantly, the move on Long Term Repo Operations (LTRO) for improving monetary transmission, in our view, is a hugely signiﬁcant one. Starting February 15, 2020 – the RBI shall conduct term repos of one year and three year tenors upto total amount of Rs. 1,00,000 crore, at the policy repo rate of 5.15%.
This essentially gives very cheap three year repo funding to banks, thereby having the potential to bring down short term rates very signiﬁcantly over the coming months. The 1-5 year part of the government security and AAA corporate bond curve are both likely to see a signiﬁcant move lower.
Overall – the RBI MPC delivered much more than what the markets had bargained for, and has imparted a signiﬁcant downward thrust to yields, especially at the shorter end of 1-5 year segment. Also, risks of a knee jerk reaction by MPC to the elevated CPI readings are now unlikely to materialize over the coming quarters and that should provide a huge comfort to various market participants and investors, to play out their long Fixed Income strategies, in a backdrop of reduced risks of a sharp upward move in interest rates.
Q. What is your overall impression from the Union Budget? And what is your fund house view on the budgetary estimates w.r.t. fiscal deficit targets, borrowing and disinvestment plans?
Answer: While the Union Budget was received quite negatively by the equity markets, it has been received with a big sigh of relief by the bond markets. Bond markets were worried about an INR 30,000 crore- 50,000 crore extra supplies this year and the possibility of INR 8 lakh+ crore numbers for next year’s gross borrowing, on the back of a big-bang stimulus announcement. However, no extra borrowings in this year, next year’s borrowings broadly in line with expectations and potential for inclusion in global bond indices are all positive factors for the bond market.
With the budget now behind us, a big overhang for the markets has been alleviated. Market participants have a more comfortable outlook on the demand-supply situation for Government securities and some of the risk premium that was priced into the yield curve is likely to get unwound.
Q. What would be your advice to investors with short, medium and long term investment horizons in debt funds? Where should they invest?
Answer: Investors with a short investment horizon of 1-2 years can look at AAA oriented Short Term Bond funds or passive, rolldown strategies in the 3 year segment.
Investors with a medium to long term investment horizon (3 years+) can look at funds which invest in higher yielding AAA and AA securities, where the yield pickup compared to the AAA PSU bonds is very attractive. For example, a AAA rated NHAI annuity bond currently trades at spreads of almost 250bps over a plain vanilla AAA PSU bond, which in our view rewards investors very well for taking some amount of illiquidity risk. While there is an element of credit risk in these securities compared to AAA PSU bonds, one can choose portfolios where the underlying issuers are those with sound credit fundamentals and despite the stressed environment over the past year, still have maintained their ratings or been upgraded.
The other segment which remains attractive is the longer end (> 7 years maturity) of the AAA corporate bond curve, where spread over government securities is still more than 70bps, while the spread in the short to medium end of the curve has collapsed to <25bps over the past few months.
Q: Is it worth enough to opt for div. Payout for the regular income goal? What would be your advice to the investors who have already invested in Dividend Plan of Debt Schemes for this purpose?
Answer: It is best to consult a financial advisor because now with the introduction of new tax slab and investors being given the option to choose between the two. The implications for different investors may differ.
Q. What is your advice to investors looking for superior returns in safer avenues? Which debt funds would you suggest them to invest in with medium to long term horizons?
Answer: We continue to believe that for investors able to take MTM volatility, the 10-year AAA bond strategy is likely to perform well over a 2-3 year period, given the attractive carry.
Similarly, we also believe that - going forward -markets will start focusing on the less liquid AAA and AA rated papers of good quality issuers, which offer attractive credit spread over the liquid AAA papers.
For investors looking at products which benefit from the extreme credit risk aversion prevalent currently and the attractive spreads available on the less liquid bonds. With a large part of the liquidity driven rally in the 2-5 year liquid AAA space now behind us, we believe that the carry offered by the less liquid, moderate risk AAA/AA bonds stands out in terms of attractiveness and the yields in some of these issues have already started moving lower over the past few weeks.