In midterm we feel there will be scope for RBI to ease further as inflation -growth dynamics remains in favor<
01-Jan-16   14:49 Hrs IST

Mr. Siddharth Chaudhary
In an interview with Anjali Raulgaonkar from Capital Market Publishers, Siddharth Chaudhary- Fund Manager - Fixed Income, Sundaram Mutual Fund said, We largely keep strategic allocation of fund in line with fund mandate and look for tactical opportunities unless we have a very different view from the market consensus.


  1. What are your views on fixed income market? How have the yields moved and which direction you see them moving in near to mid-term and why? What will the key driving factors for yields?
  2. The Fixed income markets have witnessed substantial rate cuts amounting to 125 bps by Central Bank this year. The money market rates largely reflect this due to the anchoring by RBIs term repo operations but long term yields have not reflected the same. There are many reasons behind this like domestic and global macroeconomic factors and also demand- supply mismatch. After the seventh pay commission recommendations and mid-year economic review, bond markets have started commanding risk premiums reflecting the greater fiscal uncertainty and the possibility of higher bond supply. This is likely to continue to weigh on the markets and to add to some steepening pressure on the curve until more clarity emerges on Fiscal deficit targets.

    In midterm we feel there will be scope for RBI to ease further as inflation -growth dynamics remains in favor.

  3. What is your strategy for short term funds? What is your exposure to long term funds and why?
  4. A large part of short term fund is deployed in money market securities with higher accrual yields and short term bonds. The overall duration of the fund is managed by allocation to medium term bonds and G-sec.

    In longer duration funds the strategy is to earn higher capital gains through appropriate strategic allocation and ability to make profitable tactical shifts. G-sec and long term AAA rated liquid bonds provide suitable investment option for this strategy.

    However, these strategies may change depending on various factors.

  5. Kindly share your views on recent inflation movement? Where will the inflation curve move in near term? Why?
  6. Drivers of inflation remain benign (rural/urban wages, fiscal deficit, global commodity prices) and supportive of a deceleration in inflation outlook. The near-term risk to inflation outlook could come from food prices due to weak incoming data on winter crop sowing

    The focus will now shift on inflation target of 5 percent. for Jan 17, having met the Jan 16 CPI target of 6 percent. Agricultural inflation can come under pressure as economy faces second consecutive drought but fed hike fears will keep commodity prices or imported inflation under check hence acting as balancing factor.

    Further high real lending rates are preventing growth from reaching potential thereby containing inflation.

    The RBI has expectedly clarified that it will look through any one-off impact on inflation due to the 7th Pay Commission or the implementation of GST. We expect inflation to move in range of 5-6 percent in near term.

  7. What's your investment strategy?
  8. We focus on keeping our investment strategy and management style in line with mandate of the particular fund. The investment mix shall be based on a thorough research of the general macroeconomic condition, political and fiscal environment, systemic liquidity, inflationary expectations and other economic considerations.

  9. How often do you re-balance your debt allocation?
  10. We largely keep strategic allocation of fund in line with fund mandate and look for tactical opportunities unless we have a very different view from the market consensus. There is no time based rebalancing strategy but there is constant monitoring and any significant deviation is corrected after cost-benefit analyses.

  11. If the interest rates fall further what will be your strategy for debt funds?

RBI has front loaded its policy actions in the face of weak domestic and global demand conditions. Currently RBI has taken a pause and going forward, the RBI is likely to remain accommodative while remaining vigilant on inflation front. We expect long term yields to soften further even if further repo rate cut does not materialize as current spreads vs historic median spreads remain quite high. At that point we would like to revisit our strategy and allocation to long term securities in particular. Money market yields may go up in coming quarter as credit growth shows some sign of pickup and FPI flows dissipate affecting liquidity. We would like to keep our maturities in right bucket so as to be ready when opportunity arises.

7. What is your advice to the investors?

We would advise existing investors to remain invested in duration funds as they should get a better exit opportunity as explained above. New Investors in short and medium term funds should invest a part of their money in duration funds keeping in mind volatility for at least 9-12 months and rest in liquid funds with the aim to increase allocation as opportunities arises. Investment in liquid and liquid plus categories have become attractive for Jan-Mar 2016 quarter as money market spreads have widen in last month .

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