Inflows from passive funds into the government bond market will be significantly lower this year and for active flows, the trend is flattish-to-negative, feels Mahendra Kumar Jajoo, CIO-fixed income, Mirae Asset Investment Managers. He tells Anupreksha Jain that as the rupee aligns with the real effective exchange rate (REER), foreign investors will look at India positively again. Excerpts:
Where do you see yield on 10-year benchmark heading towards by the end of March?
By March-end, the yield on 10-year benchmark is likely to remain in the current range of 6.65-6.70%. Since it is also the end of a quarter, people are more focused on liquidity management and balance requirement. However, over the next three-to-six months, it (yield) may inch further downwards to the 6.40-6.50% band. The downward trajectory is expected as the Reserve Bank of India may cut rates twice more. Earlier the expectations were of a total cut of 50 basis points but now the view is the regulator may cut rates by a cumulative 75 basis points.
The domestic government securities (G-Secs) market seems to have disassociated itself from the US market? Can we say that there will be more focus on domestic factors, going forward?
Directionally, India is still integrated with the global market. As far as this recent divergence is concerned, in last three years, the spread between the US treasury and the G-Sec yields has come down from 500 basis points to 200 basis points. With the domestic economy doing well with inflation largely well behaved and the RBI being more focused on domestic factors, domestic yields were largely stable while US yields were volatile. Moreover, the domestic fiscal situation is much better than that of the US as fears of a rising trade deficit have resurfaced with Donald Trump’s return as president.
Currently, the G-Sec curve is flattish while there has been an inversion in the corporate bond market? What is the reason for the inversion and when can we see normalisation in the curve?
Banks have been hunting for deposits. Consequently there has been an increase in the supply of short-to-medium-term certificate of deposits. Whereas at the longer-end, in the corporate bond market, there is not much of a supply, but there has been good demand from insurance companies and pension funds. Therefore, the corporate bond curve has got inverted. This has not happened in G-Secs, as the government is a continuous supplier even at the longer-end. At the shorter-end, there was a reverse mismatch — liquidity is tight and there is supply but not enough demand.
How deep is the problem of liquidity? How much has the slowdown in the government spending impacted it?
Government spending has been one big factor because cash balances have been rising. The RBI has already injected close to Rs 4-5 lakh crore into the system but, looking at the present situation, it seems it is not enough to pull the liquidity from negative to positive. In April, if government spending improves and the RBI continues to inject funds, then certainly it will improve. But, if we continue to see drain on the exchange side, then it will dilute the impact of the RBI measures, hence it is an open situation. However, once RBI gives the policy guidelines that they want to neutralise the liquidity deficit, then it has multiple tools at its disposal. Therefore, I am more optimistic about liquidity situation to be normalised in due course.
How do you see fund flows from active and passive foreign players in the debt market?
I think passive flows have slowed down. Last year, a majority of the FPI flows were because of (domestic bonds’) inclusion in global indices, with some associated trading flows. This year…we do not see any massive increase in fund flows. Therefore, even the passive flows will be significantly lower this year. For active flows, the trend is flattish-to-negative, because of two reasons: one is that in the US, you are getting yields which are much better and then if you go to markets like Brazil and Mexico, their currencies have gone down and yields have gone up. So, if today Brazil is offering you an 14% plus 10-year bond yield after 20% currency depreciation, that market may be more attractive to FPIs than the Indian bond.
Going forward, which segment is likely to perform better? How do you suggest an investor to allocate funds?
If the RBI cuts rates by another 50 basis points, then both short-end and long-term bonds will perform. Therefore, in my view, the allocation should be 75% in front-end and 25% in long-end for a very template kind of investment. But then again, for each investor, it will depend on one’s risk profile.