In Conversation with Prashant Pimple, CIO – Debt, JM Financial Asset Management


Given the current inflation scenario, Prashant Pimple, CIO – Debt, JM Financial Asset Management presents his insights and advice in this interview.

The US Federal Reserve has signaled that it is ready to move forward with several 50 basis point interest rate hikes over the next few months. How will this affect Indian debt markets?

Central banks around the world, including the Federal Reserve, are likely to be on a path to hike rates to keep inflation under control. Food and commodity-driven inflation is now turning into general inflation which, if left unchecked, can lead to lower potential growth. Consequently, even if short-term growth potential is sacrificed, central banks will not hesitate to raise rates. Although inflation is the main reason for the Reserve Bank of India (RBI) to raise rates, it will also have to do so in order to balance the resulting impact on the currency. This would mean that Indian debt markets will continue to see higher rates, a flatter yield curve and lower liquidity until real rates turn materially positive.

How do you position your Debt fund portfolios, in particular, core debt categories such as dynamic bond funds, corporate bonds and bank funds and PSUs in the current high inflation scenario?

We maintain a low duration in most of our funds. This reflects our conservative current duration stance near the lower end of the range given our expectation of further rate hikes by both the RBI and the US. Given that corporate bond spreads are unattractive due to lower supply since the pandemic, we have been underweight in this category and favor sovereign bonds to achieve the desired duration.

Given the higher borrowing expected by the Union government, where do you see the benchmark yield for FY23?

The increase in borrowing is a factor in the budget deficit as well as inflows into small savings schemes, etc. The FY23 budget was established on realistic assumptions. However, a lot seems to have happened since then, given the geopolitical issues and the resulting increase in oil, fertilizers, food subsidies, etc. We do not rule out the need to borrow more than expected, but it is too early to assess as well as there are several moving variables on the budget deficit. Nonetheless, we expect yields in general to have an upward bias in a rate hike scenario. Beyond June, factors such as increased supply of SDL and corporate bonds, potentially higher supply of government securities due to the fiscal slippage in the second half of the year, the path of inflation higher given the high oil prices and lack of RBI support measures could all lead to higher yields.

Should investors in long term debt funds and gilt funds stick with their investments during the current cycle of rising rates or consider alternatives such as floating rate or short term funds to maximize their returns?

Investors are advised to match the funds to their investment horizon. Additionally, since a significant repricing of the yield curve has already occurred, investors may consider investing in medium to long duration funds in a laddered fashion.

How should a retail investor approach debt funds in the current scenario?

From a retail investor’s perspective, the asset allocation of their portfolio in a given economic scenario is of paramount importance. In the current scenario, a retail investor is primarily concerned about the inflation issue and rates have started reacting to higher inflation over the past two months, which argues for a debt allocation . An investor should be sure of their investment horizon in the first place and therefore may consider staggering their investment in medium to long term debt products over the course of this year. As rates are expected to have an upward bias in the current scenario, the investment horizon at the time of investment will play an important role in determining an investor’s returns.


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