India’s JM Financial Mutual Fund plans to shift its investment strategy towards earning interest
income from bonds while reducing “duration risk” as it expects
the central bank to begin raising interest rates as early as
October, an executive said.
The bond markets rallied on Friday, after the Reserve Bank
of India kept its key policy rate and stance unchanged, and
announced a slew of measures to attract dollar inflows.
Yields on bonds with maturities up to five years plunged
15-20 basis points and those on shorter-duration corporate bonds
also dropped. The 10-year benchmark bond yield logged marginal
declines.
Bond yields move inversely to prices.
“The strategic call may lean towards gathering accrual while
shortening duration,” JM Financial Asset Management’s Killol
Pandya told Reuters’ Trading India forum, referring to a
strategy that allows traders to lower their exposure to bonds
whose prices are highly sensitive to interest rate changes.
The fund manages debt assets worth around 29 billion rupees
($303.18 million).
Many of the domestic tailwinds are behind us, including 125
bps of rate cuts, the Goldilocks growth-inflation outlook and
upcoming El Niño concerns, he said.
While the market is divided over a rate hike at the RBI’s
next policy meeting in August, Pandya expects the central bank
to stand pat that month.
“As of now, I feel RBI may look to act probably in the
October policy – that seems to be the base case. I think RBI may
retain its orthodox dosage of 25 bps per hike. As things stand,
the rate hike cycle may be in the range of 75-100 bps,” he said.
He expects the 10-year benchmark bond yield to trade in the
6.90% to 7.10% range over the next couple of months and will
prefer a blend of sovereign and corporate bond exposures to
shore up accrual.
“The massive market volatility may be a trader’s playground
and I expect it to keep throwing up tactical opportunities,” he
said.
Sustained energy challenges could seep into inflation
expectations and prove difficult to reverse, Pandya added. A
Reuters poll of economists estimated retail inflation
accelerated to 4% in May from 3.48% in April.