The Reserve Bank of India is expected to cut repo rate by 25 basis point at its third bi-monthly policy to be announced today, said Shobhit Mehrotra, Senior Fund Manager - Fixed Income and Head of Credit at HDFC Mutual Fund, in an e-mail interview to Moneycontrol.
Mehrotra expects the yield curve to steepen driven by the surge of liquidity in the banking system post demonetisation.
However, he also expects risks stemming from global factors such as the hike in rates by US Federal Reserve and a likely announcement on unwinding of the Fed’s balance sheet.
Mehrotra feels the surge in liquidity in the banking system is expected to last for some more time. Even though RBI has been taking steps (OMO sales) to suck out the excess liquidity, the fund house does not expect RBI to keep liquidity in a comfortable zone, which would, in turn, affect the rate transmission.
Below are the verbatim excerpts from the interview
What is your outlook on key interest rate determinants? What is your credit outlook?
Mehrotra: The outlook both on interest rates and credit stands positive currently. The key rate drivers – inflation, current account deficit, fiscal deficit, and liquidity are all favourably placed providing a downward bias to yields. Credit quality, post the demonetisation induced slowdown, has stabilized and is now showing an improving trend.
Where do you see the direction of yield curve in the near to mid-term? What will be the key driving force for yields?
Mehrotra: The yield curve could have a steeping bias driven by the surge of liquidity in the banking system post demonetisation and also due to large FPI capital inflows in the debt segment.
What are your expectations from RBI Policy. Will RBI go for a 25 bps point cut?
Mehrotra: In line with the consensus view we do expect RBI to cut rates by 25 bps in the August policy review.
According to you, what are the risks for debt market at this point and time?
Mehrotra: The risks for debt market at this point of time mainly stem from global factors such as the hike in rates by US Fed as well the likely announcement on the unwinding of Fed’s balance sheet in the near term.
What is the strategy you are adopting for investments in your funds?
Mehrotra: Our strategy continues to focus on the medium to long term fundamentals of the Indian economy while formulating our view on duration. With a benign inflation outlook, steady rupee, reforms such as GST helping in fiscal consolidation the view on duration continues to remain positive.
How about liquidity scenario. Do you think RBI would want to keep the liquidity in the comfortable zone?
Mehrotra: The surge of liquidity in the banking system post demonetisation would continue for some more time. Even though RBI has been taking steps (OMO sales) to suck out the excess liquidity, we do expect it to keep liquidity in comfortable zone else the rate transmission will get affected.
How do you think demand for corporate bonds would be from mutual funds?
Mehrotra: The demand for corporate bonds from mutual funds would be quite good but largely focused in the short to medium tenors of up to five years.
What is your take on short-term money market instrument rates? Do you think there are enough issuances in the market?
Mehrotra: The short term money market instrument rates move in line with RBI’s repo rate and the prevalent liquidity in the system. Good quality issuances are not enough in the market as the supply of CDs from banks has seen a large scale reduction post demonetisation.
How is the participation from retail investors in debt products? Is it still more of an institutional dominant segment or retail investors have started participating?
Mehrotra: The participation of retail investors in debt products varies according to product category. In the shorter end of liquid funds clearly the dominant segment is institutional while in credit opportunities space retail segment is dominant.
Tell us about your Credit Opportunities Fund? Such funds are suitable for which kind of investors? How stable are these funds?
Mehrotra: HDFC Corporate Debt Opportunities Fund (CDO), our flagship product in the credit opportunities space was launched in Mar’14 and has grown to a size of over Rs12000 crores in just over three years. The fund mainly focuses on generating returns from interest accruals by investing in good quality non-AAA corporate bonds. The fund is suitable for all investors with three years investment horizon and moderate risk appetite. The volatility in credit funds is a function of interest rate movement and credit migration or changes in credit ratings of underlying bonds. Generally, credit funds have not been as volatile as long duration products mainly because of their lower duration.
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