In an interaction with Rahul Singh Senior Fund Manager – Fixed Income LIC Mutual Fund Asset Management Ltd.

"Rate cuts are a possibility from the next calendar year"

How do you read the current hike in interest rate by BOE and SNB? Can we see inflation once again spiking ahead for India or will it take a different path from the developed markets?
 

DM central banks are poised to tighten policy, especially in the UK and Euro zone on account of inflation not coming to the expected levels. Risk-aversion driven by recession fears could ensure that yields trade on the softer side. Shorter-end yields might not fall sharply, thus ensuring that the yield curve remains inverted. The USD supportive environment should remain in place driven by global recession fears, although there could be considerable divergence in its performance. I believe that in India inflation may remain within 4-6 per cent which is the comfort level of the central bank. However, there could be risks emanating due to spill-over of aggressive policy actions globally as well as an uptick in the global commodity prices.
 

How do you see the monsoon and El Nino impacting the trajectory of inflation going ahead?
 

The monsoon in India has made a slow start but by end of June it has covered most parts of the country. As per the India Meteorology Department, the forecast is of normal monsoon and I expect and hope it to go that way, else it will have significant bearing on inflation, which I expect to clock 5 per cent and above in the second half of the financial year. Food inflation being as volatile as it is will surely push inflation close to 6 per cent if the monsoon is below normal or if there is uneven distribution.
 

The Reserve Bank of India has maintained the current interest rates in June. What can we expect in terms of the rate trajectory for the rest of the FY24?
 

MPC members are confident of India’s growth momentum holding up even as global growth is likely to weaken on the back of domestic consumption and investment cycle. They are increasingly emphasising the 4 per cent inflation target going forward given that the domestic growth momentum is positive. They have also justified the withdrawal of accommodation as financial conditions have eased, liquidity is in surplus and inflation risks could emerge from El-Nino that will impact food prices.
 

With global central banks stepping up rate hikes, a delayed monsoon and easing financial conditions, MPC is seen on an extended pause with no change in stance in the next two policies. More clarity is likely to emerge in October on monsoon, trajectory of the Federal Reserve and next year’s domestic inflation. There is a possibility of stance change in December and rate cut in February or April, provided inflation projections are in line with the RBI’s projections and there are no negative surprises globally.
 

"I believe that in India inflation may remain within 4-6 per cent which is the comfort level of the central bank."

 

"If the investment objective is over a short term, one-year products like low-duration and money market may be considered"

 

Considering the pause in interest rates, how should investors strategise their asset allocation in debt and equity? And in this scenario, where does the fixed income market currently stand for a moderate risk investor?
 

Although I am not an expert in equities and will there not be able to comment on the market, as far as debt is concerned, the market is attractive in both the short and long terms. For moderate risk investors it’s important to invest in high-rated bonds or long duration funds to take advantage of the yields and possibility of MTM gains in the next 12-18 months as the rate cut cycle commences.
 

Can you share some insights on the short-term and longterm prospects for the debt markets? 
 

Headline inflation has come down in the last few months, which is a positive factor. However, there are risks to inflation rising in H2FY24. One of them would be the trajectory of the monsoon which is significantly below normal as of now. While OPEC has been reducing output, oil prices are not firming up. However, any increase in H2 could be inflationary. At the same time, lower global commodity prices should drive corporate margins higher and are likely to drive core inflation lower. CPI inflation should ease to approximately 5 per cent but a lowerthan- normal rainfall poses upside risk.
 

If the investment objective is more than one year, one may invest in long-duration funds. Inflation has peaked out globally and the focus would start shifting towards growth. The RBI sees long-term inflation at around 4 per cent and with the repo rate at 6.5 per cent it’s not ideal to have 2-3 per cent of positive real rates if the economy has to achieve high growth in the next five years. Hence, yields need to come down from the current levels and rate cuts are a possibility from the next calendar year. Thus, long-duration is attractive. If the investment objective is over a short term, one-year products like low-duration and money market may be considered.