What kind of fixed income options should you look at for investing? Dwijendra Srivastava answers

"I think a couple of more inflation numbers will be impacted by the base and you would see the headline number being lower than what the RBI has forecasted," says Dwijendra Srivastava, Sundaram Mutual.

Do you see the bond yields going below 6.9 and then maybe there will be a range bound movement? What is your analysis on the yield movement for maybe one more quarter?
I think it can go there. Technically we can see 6.80% coming on the 10-year benchmark primarily it is because of the fact that we have set a high base last year on inflation. Despite the seasonality in the current inflation number, we saw 0.5% sequential momentum and the headline number it was a little below what the market was expecting.
I think a couple of more inflation numbers will be impacted by the base and you would see the headline number being lower than what the RBI has forecasted. So I think that can play on the minds of the investors and you could see a sequential momentum building up on the yield front and the bond portfolio. Basically the investors, the traders would build up their positions. Already I think the market is loaded up on bonds in general. I think that is what we are reading into the market as of now.

I want to understand this entire situation with the backdrop of poor monsoon that is what we are hearing and estimating. We had SkyMet, we had IMD also coming up saying that there will be a late entry of monsoon this time and we will not be seeing a usual or a normal monsoon. Now if this situation really gets severe, what are we looking at? Inflation going up again and so far it is below the upper limit of RBI and comfortably below the upper limit of RBI and then we might also see the pause for the rate hike extending but do you think monsoon is something that is going to be a major trigger now going ahead?
To answer that I think we have to look at our CPI inflation. It is heavily weighted towards food and fuel and 50% is food and fuel. And because of that in case any vegetable inflation and fruit inflation comes in, right now what we have been seeing is the protein inflation in CPI basket. And if any food inflation comes back in terms of vegetable and fruit inflation, I think that will cause the headline to move higher than what is anticipated.
So that is something which we have to bear in mind and market is also definitely looking at the core. Right now the trigger for the bond market has been largely the pause by RBI and the other thing is that core momentum also has slowed down.

If you look at the core from about 5.8, 5.9, however you read it, it has come down to 5.1 to 5.2%. And a poor monsoon, if it plays out, will have an impact on the food prices and that could stop the bond rally. Also the other thing which market will probably look at is the kind of supply we are witnessing from the government. In case the growth slows down and any deviation in terms of the borrowing that could also play on the minds of the bond. So these are the kind of caveats which we have to built in into our buying of bonds or long bonds rather.

Do you think the last six months of the year we might just see rate cuts happening or you think the pause is going to extend longer than expected?
We think that slowdown has started, particularly on the global front. We started our rate hikes because of Federal Reserve, the developed nation. Our central bank was in no mood to raise rates. Whether we accept it or not it was primarily because of the global environment we started raising rates. And I think that will again play out, the playbook will be in the same sense.

We will probably see the central bank cutting rates when they get a leeway in terms of the global environment. So what happens in the US, we have to be very critical in that space. We have to see how they progress. If there is an extended pause in the overseas markets, I think we will also see extended pause. But there is a good chance that the Indian central bank will probably try to front run the overseas central banks. That is what we can understand at this point in time. So I think answer is very difficult to say at this point in time that whether there will be extended pause or not but inflationary momentum is quite strong and we have to bear that in mind while building up any rate cut cycle.

We think that even if a rate cut cycle happens, which will be again in line or in phase with the global central bank, we think it will be a shallow rate cut cycle.

Is this the time to park in money for medium to long term? Looking at the interest rate scenario now, what do you think? What should be the strategy?
What we have seen over the years is that the capture of the investor on the long bond side is very low because of the simple reason that the liquidity on the long bond suddenly vanishes.

So what we suggest is that if you want to really capture the interest rate movement, better be on the medium duration product. We believe that probably the yield movement will be there and already we have seen some 40 bps down move on the 10 year bond yield and I think further another 30-40 bps move could happen depending on what the momentum is there in the future.

But I think it is better if you are not a very savvy investor, stick to the medium duration product where ample liquidity is available and exit is also available on a daily basis and the yield movement is not very discrete, it is more continuous in nature.

What kind of fixed income options would you recommend to our viewers?
We think that medium duration buckets are good and particularly in light of the indexation benefit being taken away, what we also see that the competition of the mutual fund industry is not there on the longer bond. If you look at the banking industry it offers very attractive yields and the shorter tenure, they do not offer.

So if somebody is looking for very long tenure, long term investment and fixed income as an option, they should look at very long tenure investments on the mutual fund platform. The expense ratios are very competitive and the target maturity funds offer very attractive yield and a consistent yield over a period of time. So they give you visibility of return for a very long tenure. So that is the reason why we say that if you are a very long term investor, you put your money in these target maturity fund, index funds and very constant maturity funds kind of funds which you can put while if you are a tactical investor, you are looking at fixed income for a 12 to 24 month kind of horizon I think either mature duration if you are a risk averse investor or you put money in medium duration products depending on how you are looking at the market.