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In this context, Rajeev Radhakrishnan, CFA, CIO–Fixed Income at SBI Mutual Fund, advises investors to stay selective rather than aggressive on duration.
He prefers short-end corporate bonds for their attractive spreads and portfolio carry, while recommending tactical exposure to state development loans (SDLs) amid heavy supply.
In an interaction with Kshitij Anand of ETMarkets, he shares his views on RBI policy, yield trajectory, and the evolving demand-supply dynamics in sovereign debt. Edited Excerpts
Q) Thanks for taking the time out. Did RBI policy outcome at this point in time largely met expectations soon after the Budget?
A) The RBI policy was along expected lines. Considering the extent of the cumulative liquidity infusion done since Dec 25, the expectations for any additional liquidity measures at this point in time was unlikely to be met.
Q) Do you believe India is entering a structurally stronger macro phase compared to the past few years?
A) Clearly, macro balance in India has structurally improved with contained inflation, higher relative GDP growth, modest current account deficits, and fiscal consolidation.
India’s fixed income markets are recalibrating cautiously. While macro fundamentals have improved, elevated borrowing and weak demand shape the bond outlook. SBI Mutual Fund’s CIO advises selective duration, favoring short-end corporate bonds and tactical state development loans amid heavy supply.
This contrasts with the outcomes on most other EM and developed jurisdictions.
At the same time, the capital account of the Balance of Payments is clearly a near term challenge on account of both FPI outflows and muted net FDI.
Q) If we are entering a growth phase which means there is a possibility of rise in inflation. If growth accelerates meaningfully in the second half, could that change the RBI’s rate trajectory?
A) The revised CPI inflation series is expected to better capture the underlying price pressures in the economy basis the relevant consumption basket. The question of RBI’s stance change on rates would be a function of how the inflation trajectory is expected to shape up.
Currently, we see little reason to suspect a change and policy rates are likely to stay at current lower levels for a longer period, especially over this CY.Q) How meaningful could potential inclusion in Bloomberg indices be for Indian bonds?
A) A possible index inclusion would be positive both from a sentiment angle as well as a demand side enabler. However, demand incentivisation with respect to domestic demand, is more relevant for any sustained lower yield scenario.
Index inclusion, at most provides a one-off large demand, which comes with its own issues with respect to future investor rebalancing as well as possible outflows basis global flows and risk appetite.
Q) Given lower inflation and strong growth, what is your recommended duration strategy for investors today?
A) Given the weak structural demand for bonds and the fact that we are at a mature stage of the current easing cycle, duration strategy is recommended to be lighter, with only tactical increases, based on evolving circumstances.
Shorter duration strategies are more relevant and incrementally portfolio carry would remain more relevant vs potential mark to market opportunities.
Q) Do you think that there is room for a potential tactical entry for long bond investing this year. What conditions would signal that opportunity?
A) There may be tactical opportunities, which are best captured through a smaller allocation within portfolios. Even as the traditional metrics such as slope of the curve and spreads over funding rates probably are attractive, evolution of underlying demand and supply is more relevant.
Q) How should retail investors approach long-duration funds in this environment?
A) These products should be considered as a core allocation basis the investor’s interest risk appetite, rather than looking at tactical opportunities as part of any retail investor portfolios.
Retail investors could approach core debt allocation through Debt F-O-F such as income plus arbitrage for better tax efficient outcomes apart from hybrid products, that could better optimise post tax outcomes.
Q) Would you prefer sovereign bonds, SDLs, or corporate bonds in the current phase?
A) SDL’s could provide higher spreads with the heavy Q4 auction schedule, while corporate bond spreads remain attractive at the shorter end.
Q) How does the higher borrowing number influence your outlook for the 10-year G-Sec?
A) Even as the market demand in FY27 could better as compared to the current year, the gross supply from centre and states at more than Rs 30 tr is challenging without RBI OMO.
With RBI having absorbed more than 60% of net supply in FY26, expectations continue to remain for continued support, which is dependent on how the forex flows shape up over the coming months. The heavy dependence on RBI as a source of demand is a concerning factor that shapes the outlook on sovereign yields.
We anticipate that yields are likely to stay elevated for a while, with possible upward bias.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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