Early pivot unlikely in the face of persistent inflation: UTI AMC's Chopra

Rate cuts are unlikely in 2023 as inflation appears to be more persistent this time, believes Amandeep Chopra, group president and head-fixed income, UTI Asset Management Company. In conversation with Abhishek Kumar, Chopra says rate cuts can be a possibility this year only if inflation dips below 5 per cent and the economic growth rate weakens to sub-5 per cent. Edited excerpts:

The rate-hike cycle is expected to end soon. What will be your strategy?

The thing to look out for this year is how long central banks keep rates unchanged once they achieve the terminal policy rate. Also, what markets are pricing in as regards the next phase of the rate cycle. The headline inflation rate has started to come down, but there are concerns about sticky core inflation.

We have increased the duration of our portfolios and are focusing on accrual, which is offering investors a real rate of return over inflation. We are tracking inbound data and evolving trends closely and will consider adding further duration to our portfolios.

Which funds should investors prefer from a three-year perspective?

Investors with an investment horizon of three years or more can consider allocation towards roll-down strategies and actively managed intermediate duration (one- to four-year) categories, given the reasonable yields and potential to capture gains as and when the cycle moves towards pro-growth levels.

The Union Budget is days away. What fiscal deficit levels will the market be comfortable with? How will it impact yields?

Markets are expecting some degree of fiscal consolidation in 2023-24. The Street is expecting a fiscal deficit of around 5.9 per cent of gross domestic product. A number higher than 6.2 per cent could disappoint the markets, leading to a negative impact on yields.

Some analysts expect rate cuts to start in 2023. Do you see the possibility?

We are not yet convinced about abrupt rate cuts after the target policy rates are reached. In our view, the central banks are in no rush to pivot so soon since inflation appears to be more persistent this time around. Rate cuts may be a possibility if inflation dips below 5 per cent and the economic growth rate weakens to sub-5 per cent.

Is it the right time to put money into longer-horizon debt funds, considering yields are close to their peaks and rate cuts may happen in a year or so?

The yield curve is flat and pricing in the terminal rate expectations of 6.5 per cent. It makes sense for investors to add a bit of duration since the current rates are favourable. Take for instance, the five-year sovereign bonds fetching returns of 7.2 per cent, which are about 200 basis points (bps) higher than the one-year forward inflation of 5.25-5.5 per cent. However, yields are not very attractive for sovereign papers with longer maturities since the spread is hardly 10 bps. My view is that investors should add longer-duration funds to their core holdings in a staggered manner.

Credit risk funds have been off investor radar. With spreads not widening, do you think fund managers should take higher risks to deliver better returns?

Credit funds have performed quite well in 2022, on the back of an improving economic cycle, low-interest rates, and easing liquidity as domestic and global economies opened up.

We saw one of the highest upgrade-to-downgrade ratios in 2022. We have also witnessed ‘AA’ credit spreads having reverted to their five-year averages as of January 2023. We expect 2023 to remain a stable year for credits.

With deposit growth failing to keep up with credit uptake, banks have been forced to offer higher interest on fixed deposits (FDs). Do you see that as a challenge to debt funds?

Debt funds offer a range of products for varying liquidity and investment and are integral to every asset allocation strategy. In my view, it is not appropriate to look at debt funds only from the prism of returns. Debt funds have a lot of scope to outperform bank FDs through active duration management.