In conversation with Prashant Pimple, CIO - Debt, JM Financial Asset Management

Given the present inflation-led scenario, Prashant Pimple, CIO - Debt, JM Financial Asset Management presents his perceptions and advice in this interview.

US Federal Reserve has indicated that they are prepared to move ahead with multiple 50 basis points interest rate hikes in the coming months. How will this affect the Indian debt markets?

Central banks globally, including the Federal Reserve, are likely to be on a rate hike path to get inflation back under control. The food and commodities-led inflation is now percolating into a broad-based inflation which if not controlled may result in reducing potential growth. Therefore, even if short-term growth potential is sacrificed, central banks will not shy away from hiking rates. While inflation is the main reason for the Reserve Bank of India (RBI) to raise rates, they will also have to do it in order to balance the resultant impact on currency. This would mean that the Indian debt markets shall continue to see higher rates, flatter yield curve and lower liquidity till real rates become substantially positive

How are you positioning your Debt Fund portfolios, particularly, core debt categories like dynamic bond fund, corporate bond, and banking and PSU funds in the current high inflation scenario?

We are maintaining low duration in most of our funds. This reflects our conservative stance of running duration near the lower end of the range given our expectation of further rate hikes both by the RBI and in the US. Given that the corporate bond spreads are unattractive as supply has been lower ever since the pandemic, we have been underweight in this category and prefer sovereign for achieving the desired duration.

Given the higher borrowing expected by the Union Government, where do you see the benchmark yield in FY23? 

Higher borrowing is a factor of fiscal deficit as well as inflows in small saving schemes, etc. The budget of FY23 was made on realistic assumptions. However, a lot seems to have happened since then given the geo-political issues and resultant rise in oil, fertilisers, food subsidy, etc. We don’t rule out the need for borrowing more than as budgeted but it is too early to gauge the same as there are several moving variables on fiscal deficit. Nevertheless, we expect yields in general to have an upwards bias in a rate hiking scenario. Beyond June, factors such as higher SDL and corporate bond supply, potentially higher government securities’ supply due to fiscal slippage in the second half, higher inflation trajectory given elevated oil prices and the absence of RBI supportive measures may all result in yields moving higher.

Should investors in long debt funds and gilt funds stick to their investments during the current rate hike cycle or consider alternatives such as floating rate or short-duration funds to maximise their returns? 

Investors are advised to match the funds with their investment horizon. Also, as significant re-pricing of the yield curve has already happened, investors may consider investing in medium to longer duration funds in a staggered manner.

How should a retail investor approach debt funds in the present scenario?

From a retail investor’s perspective, asset allocation of his portfolio in any given economic scenario is of paramount importance. In the current scenario, a retail investor is mainly troubled by the inflation issue and rates have started to react to higher inflation over the last couple of months, thus making a case for starting allocation to debt. An investor should be sure of his investment horizon in the first place and accordingly can look to stagger his investment in medium to long-duration debt products over this year. As rates are expected to have an upward bias in the current scenario, investment horizon at the time of investment will play an important role in determining an investor’s returns.