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Interest rate cycle close to peak in India: Rajeev Radhakrishna

While the short-term market will be volatile with further spikes, the increase in duration will only be gradual, says Saikat Das Rajeev Radhakrishnan, debt CIO at an asset management firm. As the US Federal Reserve raises rates, the dollar’s strength will put pressure on emerging markets like India, Radhakrishnan said. Edited excerpts:

What factors will be affected by RBI policy next week?

For us, the impact will mainly come through the currency path, which should be taken into account by the Monetary Policy Committee. The strength of the dollar will weigh on us as we are net importers with consumer inflation above our target range, along with continued reliance on capital flows to the overall balance of payments. The RBI is expected to continue to focus on bringing domestic inflation closer to its target.

Liquidity has shrunk and is slipping into deficit. What are the options with RBI?

Most of the liquidity leakage is due to interventions in the foreign exchange market. This may stop for a while if the model of intervention changes. In terms of signaling, a small batch of open market sales on the screen may stop. Today, the banking system has an excess SLR (regulatory liquidity ratio) of 9%, which banks can use to increase liquidity with the help of RBI.

Can India chart its own course when it comes to monetary policy without keeping pace with global central banks?

While domestic inflation growth ultimately determines the trajectory of policy rates, it is unlikely that emerging markets will have full operational independence from US Fed policy. Given the relatively open capital account, the dynamics of the foreign exchange market will ultimately influence the formation of domestic monetary and liquidity policy.

When the rate cycle is on the rise, debt instruments can only lose value. What is the best way to contain losses?

We are close to the peak of the interest rate cycle in India. We take a long-term view of interest rates after being conservative for a while. For us, this is an opportunity to gradually increase the duration of our portfolio. Although the short-term market will be volatile with further spikes, we currently tend to increase duration only gradually. The RBI’s clarity on inflation leveling off close to the target gives us confidence.

What is your duration group?

Until five months ago, we were at the lower end of the duration range for most products. This would be slightly higher if there was currently an upward trend.

What can cause volatility in the bond market?

The hype surrounding India’s inclusion in the global bond index, coupled with changing global scenarios, will exacerbate volatility. In addition, the market is constantly adjusting to inflation expectations at the local level. Our market-based policy rate expectations will be adjusted to reflect the path of the external policy rate. In addition, it is necessary to monitor the ratio of supply and demand in the second half of the year.

What should be the forecast of a debt investor?

Investors should invest in leveraged funds from two perspectives. First, there will be short-term volatility until the end of the fiscal year. Second, we are nearing the end of the tightening cycle. The five-year government bond is 7.26%, which is quite attractive without the element of credit risk. Investment should ideally be viewed from a three-year perspective, which appears to be very favorable for sovereign bonds at the moment.

What should debt investors do now?

We say that investors should invest in duration products with sovereign securities as a backing in stages, rather than committing 100% of their invested money. Do this within the next four to five months. This is perhaps the best option for investing in bonds under the current circumstances.

Will credit funds revive?

Lending funds faltered, creating a crisis of investor confidence a few years ago. The search for high returns after the demonetization program made credit funds popular. Today, AA-rated bonds are trading at zero margin to the sovereign index. Non-AAA spreads with the same markup above AAA remain unattractive. As soon as the spread returns, credit funds are likely to regain popularity.



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