Smart Talk with Murthy Nagarajan

Murthy Nagarajan Head Fixed Income, Tata Asset Management
Murthy Nagarajan is the Head of Fixed Income at Tata Asset Management. With an expertise spanning decades in the debt market, Murthy brings in a rich and valuable industry experience of more than 21 years in the financial services space.
In this interview with Geojit Insights, Murthy Nagarajan talks about the fixed income market – the challenges and prospects, RBI’s policy stance, and Foreign Portfolio Investment.
Initial question is obviously about the current eventful market situation. What is your short term and medium term view about the bond market?

Budget is negative for fixed income market due to inflationary nature of sops announced, Fiscal slippage in both FY2019 and FY2020, stretched revenue assumptions for FY2019, and more than expected gross supply in form of dated government securities. But there are various other factors which are favorable for the fixed income like persistent undershooting of headline inflation, moderation in global growth and RBI neutral stance.  February monetary policy statement had mentioned most of the positive factors and hence decided to deliver both on stance and policy rate. The RBI has seen through the expansionary budget, as well as sticky core inflation, and viewed the recent softness in inflation prints as “opening up space for policy action”.

Although higher gross supply from government of India will continue to weigh on market, we believe that February policy was much more dovish than market expectation. RBI’s assessment of inflation trajectory going forward suggests that today’s policy rate cut was not an isolated one and going forward if inflation doesn’t surprise meaningfully from current trajectory, there is room for further easing. Post policy, we remain constructive on fixed income. Near-term demand supply dynamics might weigh on yields temporarily but upside will be limited as market will start factoring in more easing going forwards and expectation of early start of OMOs. We expect 10-year Gsec benchmark to trade in the range of 7.15%-7.45% in near term and maintain steepening bias on the yield curve.

What caution in bond investment should investors take to protect their portfolios? What should be the investment strategy in current scenario?

After a surprisingly dovish monetary policy in February, market is expecting RBI to ease policy rates further. But at the same time, higher supply from Centre and State governments is weighing on long end of the curve. Further, market expects the disinflation in food prices to normalize going forward. So, although we are expecting CPI to be benign in coming months, we do expect it to inch higher from a medium-term perspective. In such an environment, where near term outlook on inflation is positive but there are significant upside risks beyond that, investors should focus on low duration investments, which will give stable accrual. At current levels, we feel that risk-reward in good quality short duration papers is favorable.

After the introduction of marking to market for liquid funds, what investment options do the corporate and trust funds have in debt market?

For investors in liquid funds, returns are closer to the running yield of the portfolio. Investors having temporary surplus, can park the money in liquid funds. Marking to market for liquid funds is for papers maturing after 2 months, less than 2 months is still amortized. Fund managers in liquid fund cannot invest in any paper having maturity of more than 3 months. The portfolio allocation of liquid is predominantly in less than 2 months papers and most liquid funds run average maturity of 30 to 45 days. Corporates and trust funds can invest in liquid plus schemes and short term bond funds as the accrual on these portfolios are higher than liquid funds, provided their investment horizon is higher.

What portfolio actions did you take in last few weeks and how do you foresee the outcome of those actions in the near-term?

RBI is expected to cut policy rates by 25 basis points in the month of April in its next credit policy. We are running our portfolio concentrated in the less than five year bucket in our duration schemes and the average maturity is closer to the benchmarks.

What is your view on RBI’s policy stance and to what extent do you support or oppose RBI’s actions?

RBI had shifted stance to neutral in February policy and also delivered a rate cut. Further, recent media comments from RBI Governor, indicated a sharp U-turn in RBI’s assessment of India’s Growth and Inflation. In previous policy statements, RBI had highlighted that output gap has virtually closed and there are upside risks to inflation (especially on the core side). We feel that RBI has become more pro-growth and less hawkish on inflation. Given the current credit cycle and stress in NBFCs post IL&FS, we feel that this is a welcome change.

What are the advantages and threats that India faces in terms of attracting foreign investments?

India offers attractive real rates to foreign debt investors. However, lack of fiscal discipline and political uncertainty is keeping FPIs on sidelines. Current government has done a very good job in terms of reforms and has also been able to contain inflation. With inflation under control and a pro-growth RBI, FPIs should start looking at India again. 2019 being an election year, there were series of populist measures announced by state governments and then Centre also followed up with its own set of sops. This kind of fiscal populism raises concerns on India’s macro-stability.

We feel that FPIs will be able to take better view on India after elections are over. And if next government shows similar commitment to reforms and sticks to fiscal consolidation path, we will see revival in FPI flows.

The views expressed in this article are personal in nature and  is in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.


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