Breathe Easy : For Now

Amit Tripathi

Amit Tripathi

CIO, Fixed Income Investments
Reliance Mutual Fund

It’s easy to work in environments where the headline and the details, the macro and the micro, give a uniform message. But we seldom work in such easy environments. The real world is much more dynamic, with a lot of noise drowning the underlying trends. Sometimes the trends themselves are work in progress, and its best to wait and watch, rather than act in haste. The first Bi- Monthly Policy statement for 2019, hence is a wait and watch policy, or rather to use the central bank lingo, a data driven policy. The immediate corollary to that is the fact that the RBI and the markets will remain hugely data dependent, till a clear trend emerges.

The good news is that the growth – inflation dynamics have turned favorable in the recent past. RBI’s own assessment of growth has been improving meaningfully in the past few months, and GDP is now projected at 7.4% for FY 2019 vs 6.6% for FY 2018. Better still, the inflation forecast for first half of FY2019 has been revised lower to 4.7%-5.1% vs 5.1%-5.6% earlier, a drop of nearly 50 bps, and in line with market expectations.

There are risks to both these estimates. Growth may end up lower than 7.4%, due to some moderation in consumption and continued weakness in external demand. Similarly, an inflation estimate of 4.5% (excluding HRA impact), leaves little room for downside surprises. RBI itself lists down a number of variables which could adversely impact inflation projections, including higher MSPs, fiscal slippages and volatile crude prices.

The deteriorating trade balance also needs to be watched closely, as it could impact macro stability in an environment of volatile portfolio flows. RBI has rightfully stressed on the need to keep the domestic fundamentals strong, in a unsettling global environment.

For now the markets will breathe easy. Following the announcements of a reduction in market borrowing and a much easier borrowing calendar, today’s policy statement in both its tone and tenor, reinforces on the current positive sentiments in the fixed income markets.

In an environment where the possibility of rate cuts, barring a significant growth slowdown is negligible, the best take away from a fixed income market perspective is a prolonged pause. This coupled with RBI’s clear intent of providing adequate liquidity through both transient and permanent measures, ensures that the term premia for bonds will remain contained. Carry with a neutral duration construct, could be a suitable portfolio strategy, near to medium term. We prefer the 1-5 year part of the corporate bond curve, and the 3-7 year part of the G-Sec / SDL curve to implement this strategy. Long duration allocation, while supported by a favorable borrowing calendar, and adequate liquidity conditions and possible OMOs in the second half, remains tactical for now.

From a mutual fund investment perspective, Ultra Short Term & Short Term Debt funds, and Credit Funds should be the bulk of investor allocation in FY 2019. Duration should ideally be played through Dynamic Bond Funds, so that as and when the cycle turns decisively either ways, investors will be suitably rewarded / protected on their investments.

Source: Economic Times