In conversation with Sandeep Yadav Senior Vice President, Head (Fixed Income), DSP Mutual Fund

We are constructive on short-term prospects

"We are constructive on short-term prospects"

Following the RBI’s recent decision to pause its policy rates, what is your perspective on the Indian debt markets and yield curve? Additionally, do you anticipate that the RBI will maintain this stance for the rest of 2023?
 

The Indian debt markets look like a good place to invest. We are at the end of the rate hiking cycle, not just in India, but globally. As the economies slow down, central banks across the world will have to stop hiking rates, and probably cut rates. This should lead to a fall in yields – and falling yields should give good returns to investors. Yes, we expect the RBI to maintain the stance for the rest of the year. In fact, barring an adverse surprise on inflation, the markets may start pricing in rate cuts by the end of this year.
 

Given the recent announcement regarding debt indexation, what is your recommendation for retail investors regarding their approach to Debt Funds?
 

The debt indexation announcement does impact the returns of an investor. However, debt funds continue to have benefits when compared to many other channels to invest money. They provide ease of transaction, liquidity, diversification and the ability to alter the risk profile. Since most investors would prefer to diversify their investment across asset classes, debt funds will continue to see inflows as they will continue to provide benefits to the end investor.
 

What are your thoughts on the short and long-term prospects for the debt markets?
 

We are constructive on short-term prospects as the rates cycle is on its final legs and rates have probably peaked out. The yields should continue to gravitate lower. We remain very constructive on the long-term as well. As India’s economy develops further, it will bring more discipline in fiscal policies. We are already noticing it, as the country is moving down the path of fiscal consolidation. The monetary policy is anchored around inflation targeting. This will ensure that inflation remains under control unlike decades ago when the inflation could move up to double digits. This bodes well for debt market investments as investors should be protected against any negative shocks.
 

In the current environment, would an investor with a relatively aggressive strategy seeking high yields find favourable conditions?
 

Absolutely, yes! While yields have moved lower, they should continue to move much lower. The worst of inflation is behind us, global economies are facing headwinds, the rupee is on a stronger footing right now, and the government is committed to prudent fiscal policies. In such a case, this is a right time to invest.
 

"We are constructive on short-term prospects as the rates cycle is on its final legs and rates have probably peaked out" 
 

How can fixed-income instruments like bonds assist investors in navigating volatility while staying invested with minimal risk?
 

Fixed income investments give returns through (a) capital gains and (b) coupons (or yields). Usually, the returns from the coupons tend to overshadow the returns from capital gains. Since the coupon is already fixed and does not vary, a large part of the fixed income returns is not volatile. Capital gains can more often than not end up being a smaller component of fixed income returns. However, if one invests at the right time i.e. before the yields fall, one can end up getting capital gains as well. Thus, debt instruments give investors the benefit of making returns with lower volatility.