Expect one or two rate cuts in the next 6 to 9 months: Dinesh Ahuja
Fri, Sep 30, 2016
Source : Jeni Shukla, Citrus Interactive

Dinesh Ahuja joined SBI Funds Management Pvt. Ltd as a Fund Manager in January 2011 and manages various Fixed Income Schemes. Mr. Ahuja has done his Master of Management Studies – Finance from University of Mumbai and has over 13 years of experience in Indian financial services and capital markets in various capacities. He has a rich experience in managing debt schemes.

In an exclusive interaction with Jeni Shukla from Citrus Interactive he shares his views on the debt markets and SBI debt funds.

What is your view on the interest rates in the next 1 year?

Inflation is in a comfortable zone but I am not sure how much below 5 percent it can go. In the near term it looks like we have diluted and even pulses have come off. So in a few months we could also see a 4 percent kind of print but it could again settle down at 5 percent near February-March next year keeping in mind the very high weightage of food in the CPI basket and food being volatile - also keeping in mind that the 7th Pay Commission will be implemented at the central and the state level and introduction of GST next year. Even though these factors may not be too inflationary, inflation to fall below 5 percent looks difficult at this point. Therefore, I feel there could be one or two rate cuts in the next 6 to 9 months. From a longer term perspective of 1-1 ½ years, a lot will depend on the retail inflation (CPI) trajectory. If it really surprises and comes to a significant low, then we will get more rate cuts.


What policy action do you expect from RBI in the upcoming Policy Review on 4th October?

We have never heard Mr. Urjit Patel as a Governor. That brings a bit of uncertainty. He could be different as a Governor compared to his previous role as a Deputy Governor. It is really important to understand what his thought process is. I do not expect him to sound hawkish as there is no reason to be. We are in a comfortable situation – current account deficit is in a comfortable position and CPI is looking like it will go down in the next 3 to 4 months. There is a case for a 25 basis point rate cut but I am not sure whether it will be done now or in December.



What is your view on the new Monetary Policy Committee?

I think the Government has been pretty rational in its selection of the members. Going forward we are likely to see a very balanced and rational decision making with respect to interest rates.


Which is the most attractive debt fund category in the current scenario?

The momentum in the long end of the curve is very strong. Keeping in mind that they will keep liquidity in a neutral zone through Open Market Operations (OMOs) and the expectation of one or two more interest rate cuts we could still see some rally coming in. We could see long end bonds coming off by 20-25 basis points. People who have already allocated money in this category should stay invested. For fresh investments the accrual strategy looks more attractive.



Please explain the positioning of the SBI Debt funds.

In the SBI Magnum Gilt-LTP and SBI Magnum Dynamic Bond Fund we currently have an average maturity of 12-12.5 years. This comes to about 7-7.5 years od modified duration. In the SBI Magnum Income Fund we have an average maturity of 9 years. We have changed the positioning of this fund – wherein we maintain 5 to 10 years of average maturity. So it is less aggressive compared to the Gilt and Dynamic Bond Funds. In the SBI Corporate Bond Fund the average maturity is usually 3-3.5 years. The primary focus in this fund is not duration play but carry play.


We have recently re-positioned a fund called SBI Regular Savings Fund as a medium term. We intend to maintain an average maturity between 4 to 5 years. 75% of the portfolio will focus on accrual, 25% will be focused on duration calls (either G-secs of AAA rated papers). Within the 75% basket, 65% will be in AA-rated papers and the remaining 10-15% could be in A-rated instruments. So the 75% of the portfolio will provide the carry and the remaining 25% will be used when we feel duration play can be profitable. It is like an all season fund with a balanced portfolio.



SBI Dynamic Bond Fund has done extremely well in the last 1 year, 6 months, and 2 year periods, beating the category average. What has led to the outperformance?

We take aggressive calls in this fund. After 2013, there were a couple of calls that did not go right. Yet we have managed to give decent returns.  We bought tax free bonds in the month of February. That has done pretty well. Even though we missed the rally to some extent in February-March we caught up by buying tax free bonds. Even today we have some allocation as we believe there is a lot of value there. At 6.30-6.35 for someone in the 30% tax bracket it is still giving you 9.5%. This is very attractive in today’s interest rate environment. Small savings rates are coming and Fixed Deposit rates are coming off.



Do you take credit calls in your portfolios? What is the minimum credit rating? What risk management processes are in place?

We do not take credit calls in the SBI Dynamic Bond Fund. In the Income Fund, we intend to maintain 50-60% allocation to corporate bonds with a minimum credit rating of AA-. The tilt is not towards AAA because then we would not have the carry. The remaining 40-50% is played in G-secs for duration play.

We have a robust credit research team. Credit is assessed on various parameters like the promoters and their background, capacity to service debt, balance sheet etc. In the last couple of years we have never had rating downgrades. In fact we have had upgrades like Janlakshmi Finance, Repco Home Finance, Sterling and Wilson etc.


How is the FCNR deposit maturity likely to affect the markets?

I think the RBI is very well prepared. Even the market is prepared. I do not expect much of a disruption. One concern was that the RBI might not get timely delivery of the forward contracts. Therefore, they would have to dip into their own reserves. That would cause liquidity tightness in the system. However, RBI has been proactive in conducting OMOs, infusing liquidity through government bond purchases. So it should go smoothly in my opinion.


How will the US Fed Reserve Interest rate hike (expected in December’16) affect the markets?

We have been talking about a Fed hike for some time now. The last hike happened last December and now it is almost one year. The reluctance to aggressive rate increases is known to everyone. Even if there is a rate hike in December there could be volatility in the markets but then the market will not expect an immediate hike again keeping in mind the way they have behaved earlier. The market can absorb a quarter of a percent hike over a 6 to 9 month period. So there could be intermittent volatility but not much disruption.



What is more attractive currently - G secs or Corporate bonds?

Corporate Bond spreads have not been very attractive for some time even though corporate bonds have outperformed. In the current scenario we prefer government bonds to corporate bonds. In fact there are special SDLs which are trading above AAA Corporate bonds. They are trading at these levels because there is no supply and there are investors like EPFOs who mandatorily gave to invest certain portion into corporate bonds. So they will buy at whatever level it is available. But SDLs are more attractive.


blog comments powered by Disqus