RBI likely to keep rates on hold for entire 2024, says Kaustubh Gupta

Debt funds are poised to deliver decent real returns due to a surge in bond yields, according to KAUSTUBH GUPTA, co-head of fixed income at Aditya Birla Sun Life Asset Management Company. In an email interview with Abhishek Kumar, Gupta highlights that yields are likely to trend lower due to large inflows resulting from inclusion in global bond indices. Edited excerpts:

There has been some easing in bond yields in the US as well as India. Are rate cuts now closer than earlier expected?
 

After being behind the curve during the post-pandemic period, central bankers have finally pushed the market to price in rates to be ‘higher for longer’.

With the impact of tighter monetary policy now visible on growth and inflation, the market is pricing in the completion of the rate-hike cycle. This has led to the easing of bond yields.

We believe US rates have peaked, and the US Federal Reserve can start easing in the second half of 2024. However, the same cannot be said for Indian policy responses.

Given the growth and inflation dynamics in India, we think the Reserve Bank of India (RBI) is likely to keep rates on hold for the entire 2024.

How do you plan to manage the interest-rate risk arising out of the RBI’s open market operation (OMO) plan?
 

In the last policy, the RBI upset the market by announcing potential OMO sales. We believe the move could have been triggered by the RBI’s judgement that the longer-end yields in India need to align better with an uptick in global yields and reaffirm the RBI’s hawkish focus on inflation.

As global yields peak, the RBI could assess the need for large OMO sales. Given that the market could see large inflows due to bond inclusion next year, the demand-supply matrix supports a lower yield, even after taking into account potential OMO sales. Thus, we think the OMO sale announcement can slow the downward move of yields but not alter the overall view on interest rates.

What is your expected range for a 10-year bond yield in the near term?
 

In the near future, we expect the yield to be in the range of 7.15–7.3 per cent. Inflation is now less of a concern, given the decline in food prices in the past two months. Also, the government’s fiscal account remains healthy with strong tax collections.

Which part of the yield curve is most attractive right now?
 

We like the 10-15-year-long fully accessible route government securities the most. From an investor perspective, we believe this is the right time to increase allocation to fixed income.

Yields have gone up significantly after the RBI announced the possibility of OMO sales.

Given the RBI’s inflation targeting framework and inflation targeting band of 2–6 per cent, current rates provide decent real returns.

What strategy should investors adopt — should they raise the duration or wait for more clarity on OMO and interest-rate trajectory?
 

As highlighted above, we don’t expect the RBI to cut rates in the next 12 months. Also, we don’t expect any knee-jerk reaction to potential OMO announcements.

However, as bond inclusion flows pick up, along with a softening in developed market yields, the increasing duration could be rewarding for investors over the medium term.

The yields across schemes have remained in a narrow range for over a year now. Will this trend be sustained going forward?

We expect yields to remain in a narrow range in the run-up to the general election and bond inclusion flows.