In conversation with Rajeev Radhakrishnan, CFA CIO – Fixed Income, SBI Mutual Fund

Rajeev Radhakrishnan,
CFA CIO – Fixed Income, SBI Mutual Fund

In the recent backdrop of offshore flows into Indian fixed income, there could be some vulnerability with respect to reversal of flows if the global yields harden and stay higher. 

How do global developments such as U.S. Fed moves, oil price volatility, and geopolitical risks impact India’s fixed income market?
Global events primarily influence India’s fixed income market through movements in exchange rates. In the recent backdrop of offshore flows into Indian fixed income, there could be some vulnerability with respect to reversal of flows if the global yields harden and stay higher. In aggregate, even as the domestic monetary policy cycle shapes the medium-term trajectory, the market is unlikely to be independent of short-term volatility on account of global factors.

With the Rupee depreciating continuously, do you see currency volatility playing a larger role in fixed income investment decisions going forward?
From a fundamental perspective, India’s current account deficit is modest given the surplus on the services account. Modest inflation differentials with large economies also preclude any significant currency depreciation pressures. At the same time, the impact of global developments can be negative at the margin given that recent data on both portfolio and net FDI flows has not been encouraging. This is expected to create short-term volatility and impact offshore flows into Indian fixed income markets.

Is the bond market still dislocated despite improved macro fundamentals? Where do tactical opportunities lie?
There is clearly a dislocation with respect to the stance of policy not being reflected in market yields post the review in June. Large liquidity surplus and front-loaded cuts were designed to ensure better transmission of policy cuts into lending rates. Even as Bank lending rates stay relatively higher, though with some easing, the reversal of transmission through the markets is quite concerning, more so as the forward outlook on growth has challenges even as inflation is expected to be contained.

While tactical opportunities may be available at the long end of the curve, it is more apt from a risk-reward angle to focus on short duration assets that benefit from higher carry and expected tightening of spreads on account of reasonably surplus liquidity.

Have return expectations from fixed income turned overly ambitious, and how should portfolios be positioned in such a scenario?
Return expectations should be aligned with income from carry and potential spread tightening. The era of directional rate cuts driving capital gains is largely behind us, although tactical opportunities may still arise.

Do you see India’s bond market becoming more globally integrated in the near future?
This is a process that has been ongoing in a steady manner over the years, with greater access to offshore investors. It is expected that this process would continue.