Mahendra Kumar Jajoo says the RBI rate cut was pretty much anticipated by the market. It has come in the backdrop of a slowing economy and a very strong fiscal consolidation commitment by the government in the Budget
Mahendra Kumar Jajoo, Chief Investment Officer- Fixed Income at Mirae Asset Investment Managers (India) believes that the Reserve Bank of India (RBI) is not yet done with interest rate cuts.
He believes that there is a good chance that 10-year Indian benchmark bond yield may inch towards 6.5 percent in the next three to six months from the 6.65-6.75 percent band currently. This is expected to benefit fixed-income investors.
In an interview with Moneycontrol, Jajoo talks about key takeaways from the RBI policy meeting and where fixed-income investors should bet with a five-year perspective.
How do you see the first RBI rate cut in five years?
This rate cut was pretty much anticipated by the market. It has come against the backdrop of a slowing economy and a very strong fiscal consolidation commitment by the government in the Budget. Given the projections for inflation, there is tapering down close to the target of 4 percent on a forward-looking basis. So, there was a confluence of multiple factors, which were crying for a rate cut.
In my assessment, this is the beginning of a new rate-cut cycle. RBI has delivered a rate cut, but has kept the stance at ‘neutral’.
One needs to look at this policy in two parts. One part is domestic factors where there is a good justification and need for a rate cut, and then the global context where there is a lot of geopolitical uncertainty on what can go right or wrong with the tariff wars and other related issues.
Therefore, keeping a neutral stance gives the flexibility to RBI to be able to respond to the evolving situation.
Why was the initial reaction of the bond markets disappointment, even though yields inched up a few basis points post-policy announcement?
I think it is a classic case of “buy on rumours, sell on facts” scenario because the market had been building up this action. Therefore, bond yields (10-year India benchmark) had already come close to the 6.65 percent levels, which is the lowest that we have seen in the last year. Therefore, it was expected that there was going to be some amount of profit booking.
Further, the market was expecting a few specific measures on the liquidity injection. So, while the RBI has committed, very strongly, to the need to provide adequate liquidity, no specific measures were announced, and that may have been a reason for disappointment in the bond market action.
I don’t think the initial reaction is justified, and after the market is able to reconcile to the new situation and when in the course of time we see specific action from RBI, the market will find momentum again.
Two main events are now out of the way, the Union Budget and the much-anticipated rate cut. What are your expectations on yields?
The 10-year benchmark yield was broadly in the 6.65-6.75 percent band (post RBI policy decision).
If you project another two rounds of rate cuts and the final terminal repo rate in this cycle at 5.75, then also the 10-year yield at 6.75 is broadly at a spread of hundred basis points, which is a fair value for the 10-year benchmark rate in the historical context. I think the bond yield is already in a fair value range incorporating the next two rate cuts.
Therefore, there is not much scope in the 10-year yield to fall further. Which is what the market reaction (post policy) has also suggested.
Having said that, if the momentum builds up, if the inflation continues to fall in line with the projection, if the demand from pension insurance companies continues to be there, then there is a good chance that the 10-year bond yield may inch towards 6.5 percent in the next three to six months. For that, the market will have to get greater confidence and visibility of the next rate cut as well as on the liquidity measures that the reserve bank is taking.
Also, what is more relevant and is more likely to happen is the normalisation of the yield curve.
Right now, the government bond yield curve is pretty much flattish, and the corporate bond yield curve is inverted.
Now, there is a situation where the corporate bond yield curve is inverted with three-year yield being higher than five-year or seven-year or 10-year yield.
If the RBI starts cutting rates and the liquidity situation improves because of its actions and normalcy returning to the fixed-income market, then the yield curve will begin to take the normal positively sloped shape, which means there is a good scope in the one to three-year segment for the corporate bond yield to fall.
There is a very strong sense that the one to three-year segment is the one which will really perform in the next six months as the rate cuts deepen and as liquidity improves.
What is the duration positioning of your debt funds? Have the recent policy updates brought any changes?
Every fund has a different mandate in terms of how much duration it can take. For the last many months, in each of these funds, we were fully invested. Let’s say my short duration allows me to go up to three-year of duration, we were somewhere in the 2-2.75-3 year duration range. If my low duration fund allows me to go up to one year, then we were somewhere in the 11 months to 12 months and so on. And that has worked well for us because the market has been supportive and positive.
At this point, in one sentence, we’re fully invested. After the RBI policy and after the muted reaction from the market, where yields have inched up. We are still assessing the situation.
My overall sense is that it is still time to be fully invested. It is still time to expect more action in the fixed-income market.
For some time now, the consensus has been on betting long bond yields. With the rate cuts finally here, does this view still hold true?
It depends on whether the market expects further rate cuts.
Three months back, we had a situation where people were expecting RBI to cut rates in December 2024. That did not happen. The time when the US environment also became a little bit negative, analysts then deferred the rate cut expectations to February 2025.
We have seen that the economic environment is changing very frequently. In the US, we have seen that in spite of very bold rate cuts by the Fed, the long-term rates have gone up.
Once people get better conviction that the next rate cut is going to come. Then the market will start preparing for that. My view is that the environment will come, therefore, it is natural to expect that the rates will come down further from here.
For an investor with a five-year investment horizon, how would you suggest him or her to allocate Rs 10 lakh across debt mutual funds?
I will expect the investor to consult their own wealth adviser or generally look at their own risk return profile before taking any investment decision.
As a general view, at this point, we are constructive on bonds. I think there should be a location to longer duration funds.
Last year, our recommendation has been to remain on the longer bond side, which has worked.
My suggestion for investors who have risk appetite and are flexible and nimble in terms of changing their portfolio, their allocation can be invested 50 percent in the long end, 50 percent in the one-, two-, three-year segments.
People who are not so actively managing the portfolio, but who have a decent risk appetite can go 75 percent in low duration, 25 percent in long bonds.
Investors who have absolute long investment horizon and do not need the money immediately. For them, the longer duration fund with the incremental hypothesis that whenever a country graduates from an emerging market to a developed market, typically, the yield curve drifts down because of the improved macro and improved inflation situation in that country. That is true for every single country which has graduated from emerging to developed.
Now India is still closer to an emerging market than a developed market, but if you believe in the long-term India story, then you have to also believe that in the long term, yields will come down in due course of time. So, earlier we had 15 percent 10-year yields, which became 10 percent, then, 8 percent.
Now 7 percent is the new normal. So, in another five years’ time, it is possible that 5 percent becomes a new normal on the 10-year yield, in which case it makes sense to remain invested in long-term funds.
