The 2019 Budget has come and gone. It forced a few flutters in the Indian equity market. On the debt side, things weren’t that bad. Experts like Kunal Shah have given thumbs-up to the Finance Minister’s fiscal discipline alongside overseas borrowing. In a quick chat interview with RupeeIQ, Shah who dons the hat of debt fund manager at Kotak Mahindra Life Insurance Company Limited, talks about how debt securities are expected to perform post-budget, the next big trigger for the fixed income market, and interest rate outlook. Excerpts from his interaction with Kumar Shankar Roy.
From a debt market point of view, what are the hits and misses from Budget?
Hit is clearly the adherence to the fiscal deficit target of 3.3%. There were talks from officials just before the budget about the possibility of 3.6% to support growth. One more positive was foreign currency borrowing intent. The Ministry of Finance (MoF) has hinted about $10 billion raise in the second half of the year.
How do you think yield of debt securities will perform post Budget?
Yields on government bonds have already dropped by 20 bps to 6.50% post budget, we see near term trading range of 6.20-6.70%, in line with treasury yields, the corporate bond yields have also dropped. However, on the other hand, we have not seen a similar reaction from AAA rated NBFC papers showing lower risk appetite.
What are the next big events/triggers for the Indian debt market from here on?
Next big event for bond markets will be a recommendation from the Bimal Jalan committee on RBIs excess reserves. There are various possibilities of transferring of surplus if any. Hence, its impact on bond yields will also be in line with the mode of transfer.
How do you approach credit selection for your funds? Tell us your priorities.
We have always followed the philosophy of Safety, Liquidity, and Returns in debt selection. Our product structure allows us only long term safe securities. Hence, our investment allocation to credits is not significant.
The financial savings story of India is changing. There is a lot of money coming from individuals and households to financial assets. But is the Indian debt market deep enough?
This is how the evolution from passive investments in Bank’s deposits to active debt allocation will happen over time. To absorb such funds in the debt market is challenging as only a few sectors borrow from the bond market. We feel households are still under-invested in duration debt funds where there is larger scope to generate sufficient risk-adjusted returns beating deposit rates.
What are the steps and actions taken by you to shield the debt portfolio at all times?
As I mentioned earlier, our product structure demand investments in long term assets. Hence, we end up investing largely into government bonds and AAA rates securities.
Interest rates have come down, thanks to RBI. Where do you see rates in the next three years? How are you positioning your portfolio with regards to that projection?
RBI has reduced repo rate by 75bps this year aided by lower core CPI and growth. We see the possibility of another 50bps reduction in the next 6 months. Sovereign Yields should trade in and around 6.5% for next year or so. However, It will be difficult to predict for three years due to the volatile global economy. From a positioning point of view, we have reduced our duration and brought it down closer to the benchmarks.