In an interaction with Parijat Agrawal, Head -Fixed Income, Union Asset Management

Given the uncertainty prevailing in domestic capital market, Parijat Agrawal, Head (Fixed Income), Union Asset Management Company (P) Limited, shares a few tips for investors

At the recent Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meet held in early June, all members voted unanimously to hike rates and to continue the withdrawal of the accommodative stance. With high levels of inflation expected to persist in the future along with more rate hikes, what is your outlook on the bond market and yield curve in the short to medium term?

Inflation shall remain high for the rest of the year, but the trajectory remains uncertain. Commodity prices, freight and container indices have corrected sharply from peaks. The global supply chain pressure index has cooled to some extent. Some relief in input costs along with the transmission of rate hikes and normalising of liquidity conditions may help in anchoring inflationary expectations. On the other hand, energy costs and rainfall remain key risks. We do not see any meaningful improvement in the fiscal math and supply shall remain high keeping the risk premium elevated at the far end, although we may see some bearish flattening on the back of hikes. In our opinion, absolute yield levels are attractive and investors may enjoy positive real yields in the future.

How will the forthcoming rate hikes by the Federal Reserve and the high likelihood of a recession in the US affect the Indian debt markets? Will high volatility persist over the next few months? Which categories of funds are expected to do well?

While the rate hikes and the likelihood of a recession in the developed world might have some impact on the balance of payments and the currency, a lot of it may be neutralised as the commodity prices cool off and the concern of imported inflation is reduced. We do expect markets to be volatile but rewarding in the longer run. We expect short to medium duration bond funds to do well. Also, funds like dynamic bond funds and gilt funds can be good investments for investors with some tolerance for volatility.

In the present rising interest rate environment, should investors consider target maturity

In our view, the yield levels are attractive and target maturity funds give some level of certainty in this highly uncertain environment.

How should a retail investor approach Debt Funds in the current scenario?

Investors should focus on their objectives and look through the volatility. While there is a multitude of risks and associated noise, and perfect timing is almost impossible, investors have a fairly good opportunity to lock in attractive yields.