We expect 50-75 bps rate cuts from RBI: Bandhan AMC's Suyash Choudhary

With the government taking the fiscal compression path, as announced in the Interim Budget, the Reserve Bank of India (RBI) now has hardly any reason to delay relaxing its liquidity stance at a time when inflation has been undershooting the forecast, says Suyash Choudhary, Head – Fixed Income, Bandhan AMC. In an email interaction with Abhishek Kumar, Choudhary says he expects the central bank to start cutting rates by mid-CY 2024. Edited Excerpts:

Has the Interim Budget led to a change in view on any of the debt market segments?
 

The Interim Budget puts India on the path of fiscal consolidation, adding to measures put in place to enhance macroeconomic stability. This will lead to lower risk perception on Indian bonds, especially in the eyes of global investors. RBI is focused on inflation targeting, and the government has been responsive in containing the duration and intensity of food price shocks. The global bond index inclusion is also a positive from a foreign demand perspective. Given these dynamics, we are overweight 30-year government bonds in our actively managed bond and gilt funds. Corporate bond spreads have widened recently compared to the artificially low spreads in the past couple of years. We have added AAA corporate bonds mostly in our short and medium-duration strategies where ‘carry’ considerations are slightly higher than they are for longer or active-duration products.

At the start of the year, the key risk for the debt market was higher borrowings to fund populist schemes ahead of elections. Now that this overhang is out of the way, what are the risks investors need to watch out for?
 

There was no reason to attribute any large probability to this risk in our view. Though the government deficit seemed high till now, it has been accompanied by a well-contained current account deficit. There was no crowding out at a country level and the government was merely using excess savings of the private sector for the most part. Also, a substantial portion of this increment was used for high-quality capex spending that generates high growth multipliers. Risks are more linked to potential global supply chain disruptions given a volatile geo-political backdrop.

What are your expectations from the upcoming RBI MPC? Do you see rate cuts happening in CY2024?
 

The fiscal compression indicated in the Budget, including the commitment to the path ahead, will provide much comfort to RBI in the attainment of its inflation target. Ideally, the central bank should have little reason to delay relaxing its liquidity stance, especially as inflation has anyway been undershooting its latest forecast. At the same time, it is hard to say whether the shift will happen now or in April. Irrespective, the extent of fiscal compression and its potential impact on managing aggregate demand has important implications for RBI in contemplating net easing to its current monetary policy stance in the months ahead. We expect 50–75 bps rate cuts, most likely starting mid of CY 2024.

MFs have stayed away from credit risk for some years now. As the spreads have now widened, is there merit in investing in lower-rated paper?
 

The past few years have seen a very strong compression in credit spreads. A large part of this has been driven by balance sheet improvements. However, an environment of substantially excess liquidity and investors’ preference for carrying income over duration risk have also played a part. With these dynamics starting to change, we expect credit spreads to continue to normalise. At some juncture, satellite allocations to credit risk may start making sense. However, we continue to conclusively prefer quality bonds given the relative valuation. Duration risk makes sense right now if the investor has a risk appetite and a long enough investment horizon.

Which debt funds are best placed to deliver this year?

The ‘muscle memory’ from the last two years has been about optimising carry income while minimising relative duration risk. This now needs to be modified to include quality bonds and add duration. However, debt fund selection should also take into account the investor’s risk appetite and investment horizon.