MUTUAL FUNDS

Any negative surprises on fiscal deficit front could weigh on long-bond yields<
27-Jan-14   17:47 Hrs IST

Mr Santosh Kamath
In an interview with Capital Market, Mr. Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments - India, said, The current environment can be viewed as an adjustment phase for the Indian economy as we correct fiscal largesse and increased leveraged amongst certain segments of Corporate India.

Excerpts:

How will you describe the year 2013?

2013 proved to be a tough year for global bond markets as concerns about liquidity tightening led to a rise in bond yields, amidst outflows from bond funds in the middle of the year. Whilst global liquidity remained high, market liquidity in EM asset classes has been impacted by higher risk aversion of investors and the regulatory measures put in place to reduce risk on bank balance sheets. The tough global environment coupled with domestic issues highlighted India's vulnerabilities and the rupee fell sharply, prompting a reversal in the monetary policy. Concerted policy efforts by the central bank and the government have helped rein in the current account deficit and boosted the rupee. The current environment can be viewed as an adjustment phase for the Indian economy as we correct fiscal largesse and increased leveraged amongst certain segments of Corporate India.

Globally and domestically what is the monetary policies scenario?

Monetary policy divergence across EM and developed markets is likely to continue in the New Year, but overall policy environment is expected to maintain a focus on boosting credit growth and ensuring adequate liquidity. Whilst the US Federal Reserve has embarked on a gradual taper, conditions in Europe and Japan point towards a continuance of easy monetary policies. In India, the outlook for monetary policy remains uncertain, given the inflation and growth trajectories, and the uncertain external environment.

What's your outlook on fixed income markets for 2014?

Over the near term, bond yields will be driven by global news flow and local economic data. India is better compared to last May to deal with a challenging external environment. Liquidity conditions are expected to remain comfortable over the near term. Latest fiscal deficit data has been disappointing, and this will be closely monitored in coming months, and any negative surprises could weigh on long-bond yields.

Which debt schemes are attractive to invest looking at the economic and political scenario shaping up?

Against the current macro-economic backdrop, we continue to see merit in investing in funds focused on the shorter end of the curve and/or accruals. Investors with a medium to long term horizon and high risk appetite can consider funds with exposure to long dated bonds/gilts.

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