Indian bonds await rate cuts

Name: Puneet Pal

Position: head of fixed income at BNP Paribas Mutual Fund

Based: Mumbai

Years trading: 14

What asset class and geography are you focused on?

As of now we are focused only on the Indian fixed income markets. However, we do an in-depth analysis of macroeconomic conditions worldwide as all the markets are interdependent and linked with each other. We also track the emerging market space quite closely, since India, as a major player, is affected by events in emerging markets.

What is the outlook for the month ahead?

In terms of the Indian fixed income markets, we expect a 25 basis point rate cut during the Reserve Bank of India’s policy review meeting on June 2 as the consumer price index inflation cools off and wholesale price index inflation remains in negative territory for the fourth consecutive month. Overall for this calendar year we expect the repo rate will be cut by 50 basis points and expect it at 7 per cent by December. We also expect the rupee to outperform other emerging market currencies and be relatively stable, trading in the range of 62-64 versus the US dollar throughout the year.

What are the main risks, either upside or downside, to the outlook?

Any sharp increase in commodity prices can pose a risk to our outlook of further rate cuts. Any undue market volatility on account of the expected hike in rate by the US Federal Reserve could also be negative. A further deceleration in the CPI inflation below expectations will strengthen the case for a rate cut. Domestically, the monsoon will be a key event to watch out for. Food inflation depends directly on the rains, and since the food weighting is almost 40 per cent of the CPI basket the rains will play a critical part in shaping the outlook for the months ahead.

What is the best investment at the moment?

The best investment will be in the dynamic bond fund category, as it has the potential to deliver good returns over the next year. The potential for rate cuts remains very high and duration funds do well in a rate-cutting cycle, at the same time retaining the flexibility to alter their duration profile when market fundamentals change.

What was the best investment you were ever involved in?

The best investment was when we reduced the duration of our portfolios in July 2013 in response to the tapering concerns of the US Fed, when the whole emerging market space got sold off and Indian yields went above 9 per cent in response to the currency weakness. We again went overweight on duration as the currency stabilised and yields became attractive from a long-term perspective, thus resulting in a significant outperformance with our peers and the benchmark.

What was the worst?

An investment in Indian real estate securities just before the global financial crisis of 2008 could be considered as one of the worst investment decision that was taken in my previous organisation.

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