Very little room for more rate cuts: Amandeep Chopra, UTI Asset Management

He says, the rate cycle seems to have bottomed out but RBI may not change its accommodative stance anytime soon

The risk environment is improving and no major downgrades and defaults is expected, especially in mutual fund portfolios, says Amandeep Chopra, group president and head of fixed income, UTI Asset Management. In an interview with Ashley Coutinho, he says low-duration products remain the sweet spot for investors. Edited excerpts:

Are debt funds out of the woods yet? Do you expect more downgrades and defaults?

The risk environment is improving. A quarter ago we were looking at the impact of the pandemic on economic growth through declines in consumption and manufacturing. This is what was driving most of the ratings downgrades. The more recent data, which includes some of the lead indicators such as the purchasing managers’ index, index of industrial production, and quar­terly results of companies, suggest signs of a revival in economic growth. The kind of concern we had in the June quarter is lessening and we do not expect any major downgrades and defaults, especially in mutual fund portfolios. Since March, mutual funds have also moved their portfolios into very high investment-grade papers. The risk is much lower from a credit perspective for all fixed-income funds. Any risk that will linger will be confined to the credit risk category. Other than that I don’t think there is any big surprise likely for investors.

Your debt schemes have seen downgrades and defaults in the past two years. What steps have you taken to restore the confidence of investors and distributors?

We have strengthened our credit research team and looked at augmenting some of our monitoring and surveillance processes by hiring a dedicated resource. We are strengthening our investment team too. With regard to processes, we have focused on refreshing credit models and methodologies and tightening the fund framework. The investment and sales team is spending more time interacting with distributors and investors through various forums to communicate the above-mentioned changes, demonstrate fund performance, and restore confidence.

We are highlighting our schemes’ long-term track record. Due to the steps taken, we have more than two-thirds of our debt assets under management in the first and second quartiles over a one-year period and more than 80 per cent of our funds in the first and second quartiles over three years.

What is your view on the trajectory of interest rates?

The uptick in economic growth does point towards the success of monetary easing we have seen over the past few months. Further easing may not be as aggressive or even necessary. With the central bank likely to revise upward both its inflation and growth forecasts, it appears to leave very little room for further rate cuts in this cycle.

Liquidity will remain in surplus, possibly a bit longer than expected. The rate cycle seems to have bottomed out but we do not see the Reserve Bank of India (RBI) changing its accommodative stance anytime soon. There are still a few risks to global economic growth. While the vaccine is becoming a reality, the resurgence in the number of Covid-19 cases can pose challenges.

What about inflation?

Inflation rates, driven largely by food prices, have continued to remain elevated. There are expectations that food prices will ease and this has been built into the inflation trajectory the RBI highlighted recently. Will the uptick in economic growth change that trajectory? That’s a worry. The consumer price index (CPI), which is headline inflation, could moderate but as economic growth picks up, consumption demand too will pick up. Globally, we could see a recovery in commodity prices as well. The silver lining for India is that global crude oil prices are expected to remain benign for many more months.

What kind of debt products can investors look at now?

Low-duration products and the corporate bond category remain the sweet spot for investors. Investors, however, need to temper their expectations of returns, given the level of interest rates across the spectrum and the easing of the yield curve. Those looking at a low-risk sort of portfolio can expect the yield to maturity of their portfolios to vary between 4.75 and 5.5 per cent. We are heading into a bit of uncharted territory as far as interest rates are concerned. So, I would not recommend long-duration products at present.

Has the risk-on sentiment returned among companies?

The risk profile of debt funds has been aligned during the last few months. Investors have gravitated towards very liquid and very high investment-grade names, which include quasi-sovereign public sector undertakings.

What are your learnings from the IL&FS episode?

There has been a misalignment between investor expectations and their fund portfolios. One of the biggest misconceptions is that debt funds are safe. Advisors need to tell investors that debt funds, especially lower-rated papers, do carry some risk. Credit funds have borne the brunt of the recent credit cycle and may not be appropriate for new retail investors and should be sold only to well-informed investors. Investors need to diversify their holdings across debt categories and credit funds should only supplement their core portfolio.

Secondly, running an open-ended fund with a daily NAV (net asset value) for credit-oriented funds may not be a good product design. More so in the Indian context when markets can freeze suddenly and there are few avenues available for meeting liquidity needs.

Lastly, there is a need to tighten the regulatory framework for monitoring large borrowing entities that are publicly rated to prevent such episodes, as the biggest shock to the system was the size and scale of the defaults of well-regulated entities.

You have cases at different stages of resolution at the National Company Law Tribunal (NCLT). Could you give us an update on recoveries?

The timelines for some of these have been pushed back due to the pandemic. We are on track in terms of recovering in most of them and expect to see resolutions beginning from the first quarter of the next calendar year.

The committee of creditors has to evaluate the bids received and take the process forward for Dewan Housing Finance Ltd. The Jorabat-Shillong Expressway has found a suitable buyer for its assets and is awaiting NCLT approval to conclude the transaction. Similarly, Altico has found a buyer and is awaiting regulatory approval and structuring so that the buyer can take hold of the assets and pay off the bondholders. We have been able to recover and distribute full money from Zee Learn, where two of our debt schemes had an exposure. Vodafone has paid its recent bond maturities and, given the positive development on its funding plans, we do not expect any further provisions or write-offs from Vodafone papers.