Time to diversify debt investment; Rs to stay under pressure: Sandeep Yadav

Like equity markets, 2022 has been a choppy year for debt-market investors. SANDEEP YADAV, head of fixed income at DSP Mutual Fund, tells Nikita Vashisht in an interview that while the worst of debt-fund investments could be over, concerns around fiscal spending and rupee depreciation could prove to be a spoilsport going ahead. Edited excerpts:

How are bond markets reading the Reserve Bank of India’s latest monetary policy statement? What is your outlook for bond yields?

The inflation projection was largely priced in. While yields swung sharply before and after the Monetary Policy Committee (MPC) meeting, they have by and large traded flat, barring few spurts of volatility. We expect the 10-year bonds to remain volatile as the supply of government bonds could become a concern in the latter half of the year. Fiscal uncertainty due to tax cuts, and food and fuel subsidies may lead to (negative) surprises. Thus, while future rate hikes have been priced-in by the markets, further depreciation in rupee may lead to spikes in the shorter tenor bonds.

Will 2022 prove to be a washout for debt-fund investments?

The higher yields have provided a good entry point for debt investors after years of low yields. While yields may continue to rise further, the high current yields provide enough cushion to imply that the worst of debt-fund investments seem to be over.

Should investors opt for government debt funds or corporate debt funds in the current scenario?

With corporate yields in some maturities lower than the annualized G-Sec yields, it is advisable to allocate more to the government bonds and State Development Loans (SDL) funds. Markets have been expecting the spreads to widen for some time; instead, the spreads have only narrowed. It is difficult to predict whether the corporate bond spreads will widen.

What have you been suggesting to your investors? Which fixed income MFs are seeing traction at DSP?

With such uncertainty in the markets, it is prudent to diversify. We advise investors to keep investing in longer duration bonds, with maturity up to six years, whenever yields spike up; but also remember to keep a significant portion of their portfolio in shorter duration buckets – maturity up to one year. Softer inflation has provided buoyancy to bonds. However, we remain wary of risks emanating from rupee depreciation as well as fiscal spending. This is not the right time to make binary calls; one may prefer to diversify.

Where do you see the rupee headed this year amid dynamic macro-economic situation and recent bounce back in foreign investor flows?

While capital flows have reversed recently, the current account numbers remain a worry. The trade deficit at $31 billion is large. Crude oil prices have continued to remain sticky around $100 per barrel. And while the US Federal Reserve (US Fed) has begun tapering, it is too soon to gauge its effect on flows.

The FII trend is a silver lining; however, unless the trend remains durable, we expect that rupee will be under pressure and the domestic currency should trend above 80 per US dollar.