Amandeep Singh Chopra, head of fixed income at UTI Mutual Fund, shares his views on the fixed income market. After a roller-coaster ride in 2013, he believes that this year the trend of the fixed income market will be determined by local factors.
On summing up the fixed income market in 2013….
The fixed income market of 2013 would be remembered by investors for the roller coaster ride it provided. Those who invested in debt products benefitted from the dovish policy stance adopted by RBI from October 2011 till May 2013. Post June 2013, it has been a rough ride for investors as they have seen unprecedented volatility which is uncharacteristic of the fixed income markets largely due to a turn in global events that has affected most asset markets, especially for the emerging markets.
To sum it up, 2013 was a period of two halves – one which saw some benign trends in macro numbers and policy moves and another that saw the macro data deteriorating like retail inflation rising, growth falling, INR touching record lows and a reversal of policy stance which ensured that yields rose across all maturities to end nearly 75 to 100 bps higher than the preceding year.
On developments that surprised….
The sudden announcement by the U.S. Federal Reserve Bank was one of biggest surprises which was not even in the realm of discussion in the financial markets.
The subsequent sequence of steps undertaken by the RBI was another surprise as the markets could not completely comprehend the implications and position themselves.
Outlook on the fixed income market for 2014……
In our view, 2014, will be a year when the Indian economy will see major repair in several areas that “broke down”. While the global factors will remain largely constructive, it will be more of local factors that will determine the trend of local fixed income market. The key trends that will determine the direction of the economy and the financial markets will be the new government, bringing back confidence in the corporate sector and policy normalization by RBI.
In the first few months of the year the outlook for bond yields looks to be slightly positive and yields are likely to trend down as the market gains confidence on positive factors such as an expected fall in Consumer Price Index inflation, easing liquidity conditions, relatively stable INR, lower global crude oil prices and lesser supply of G-Secs in next 2-3 months. However the uncertainty surrounding the outcome of elections, the borrowing program of the government and the interim budget may not allow the yields to fall sharply. During the second half of the year the factors mentioned above will drive the markets.
Macro factors that are of concern for the Indian economy..
As a lot of present financial year problems/risks have been deferred into the next financial year, the markets will look for a credible fiscal consolidation road-map from the new government and attempts at reviving investment activity to address the supply-side bottlenecks that are leading to a sticky core-inflation. Only then can one see a stable interest rate environment.
This is an extract from an interview that features in the India Fund Observer 2013, an annual publication that encapsulates the key trends in the financial and mutual fund markets during the year. It will be available online in February 2014.
