Fed's September rate cut unlikely to alter RBI stance: Rajeev Radhakrishnan

Rajeev Radhakrishnan, chief investment officer (fixed income) at SBI Mutual Fund, remains optimistic about the demand-supply dynamics, citing sustained overseas demand as a key factor. In an email exchange with Abhishek Kumar, Radhakrishnan notes that global central banks’ potential policy easing could further bolster demand. However, he cautions that portfolio flows into India may be vulnerable if the economic slowdown expands beyond the US, potentially impacting investor sentiment. Edited excerpts:

With the Reserve Bank of India (RBI) emphasising the 4 per cent inflation target and the economy remaining on a strong footing, are rate cuts still some quarters away? Could a US Federal Reserve (Fed) rate cut in September affect the RBI’s stance?
 

Yes, rate cuts in India remain quite distant at present. The timing of rate cuts in India will depend on the evolution of the country’s growth and inflation outlook.

While economic growth remains fairly resilient, Consumer Price Index inflation is expected to be slightly above the 4 per cent target. Therefore, the Fed’s actions in September are unlikely to influence the RBI’s stance in the near term.

How do you view the latest US economic data? Will a slowdown in the US have any spillover effect on the Indian economy?
 

The latest data and Fed commentary indicate that the impact of past rate hikes is starting to affect economic activity, even as inflation remains slightly above the target. The Fed is likely to ease policy rates over the coming months. However, markets often overreact to individual data releases, which may continue for some time.

A slowdown in the US that affects global growth, trade flows, and capital inflows could eventually impact the Indian economy and portfolio flows.

What are your takeaways from the Union Budget?
 

The Budget provides a strong foundation for continued fiscal consolidation over the coming years, which is promising from a medium-term perspective. The Budget numbers, particularly regarding tax buoyancy, appear conservative, and expenditure commitments are not aggressive. This opens up the possibility of rationalising market borrowings in the fourth quarter, depending on overall revenue trends.

While the commitment to reduce public debt to gross domestic product is laudable, a clearer commitment with less ambiguity regarding the flow variable, i.e., fiscal deficit, and an independent assessment of fiscal strategies, as is prevalent in developed markets, would likely have provided more credibility and confidence.

There are discussions that gilts may be in short supply this year due to lower supply and higher overseas demand. How do you view this from a debt market perspective?
 

The demand-supply dynamics remain positive. Overseas demand is expected to continue, especially if global central banks ease policy. It is crucial to understand how the central bank responds to the need to sterilise the liquidity impact of capital flows into both equities and bonds.

With overnight rates closely aligned with the policy rate recently, core liquidity has increased, potentially leading to an undershoot of the repo rate’s operating target if unsterilised. The RBI’s recent bond sales in the open market through the screen should be viewed in this context.

What is your view on longer-tenor government bonds (over 30 years)? Is there potential for further gains?
 

While demand-supply dynamics are well-matched with steady demand from long-term investors, secondary market liquidity is constrained as core investors are primarily buy-and-hold.

The exclusion of foreign portfolio investors from this segment, the tapering of flows into non-participating products, and the supply of long-tenor state development loans (SDLs) are factors to consider moving forward. Domestic investors might prefer long-tenor SDLs over long-term sovereign papers, particularly if spreads widen.

What is your outlook on corporate bonds — AAA-rated as well as lower-rated papers?
 

Short-tenor AAA bonds are attractive both from an absolute level and a spread perspective, while long-tenor AAA bonds are anchored at tighter spreads due to investor demand.

Lower-rated credits should be evaluated on a bottom-up basis, with credit comfort, including appropriate covenants, being the primary determinant rather than spreads.

What will your strategy be going forward?
 

Strategies will be shaped by specific scheme mandates and evolving expectations of monetary and liquidity policies from the central bank. The fiscal trajectory is positive from a medium-term perspective, though the inflation outlook remains uncertain.

While some global central banks may ease policy based on domestic conditions, it is premature to extrapolate similar actions to India without assessing the domestic growth-inflation mix. Currently, this equation does not warrant immediate policy rate actions by the RBI.