Mr. Abhishek Bisen

Senior Vice President - Kotak Mutual Fund

Mr. Abhishek Bisen has done BA Management, MBA Finance. He has been associated with the company since October 2006 and his key responsibilities include fund management of debt schemes. Prior to joining Kotak AMC, Abhishek was working with Securities Trading Corporation Of India Ltd. where he was looking at Sales & Trading of Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments also include 2 years of merchant banking experience with a leading merchant banking firm.

Q . What impact do you feel the current Russia-Ukraine conflict will have on the domestic economy and markets? Also, what are your expectations on the inflation front? Will there be an impact if the oil and gas supply is disrupted globally?

Answer : This is a 6 sigma event which has triggered it will have implications on economy which will be reflected in both equity and Debt. There is no direct impact on fixed income market as such. However as India is large importer for energy and as the prices have shot up significantly therefore there will be impact in trade deficit and inflation. As the economy normalises the demand will be even more stronger therefore both trade deficit will be under pressure and upside risk on inflation will make it challenging for the RBI to remain pro-growth policy. This will forces RBI to normalise policy sooner than later. Assuming CPI at 5-5.5 ( RBI projection are 4.5 may get revised upwards ) repo rate which is at 4% need to be at 5% as soon as possible if not 5.5%

This will effectively mean a rate hike of ~150bp in overnight rates.

Q . Do you think that the year 2022 will be a challenging year for debt investments with possible rate hikes and high government borrowing? How likely, and when may such events unfold? And What would be your argument in favour of debt funds when traditional fixed income instruments at the short end of maturity are offering better returns?

Answer : (i) Yes it will be a challenging year not because the rising rates but multiple events unfolding together such as one side Indian economy is formalising or tax compliance is improving faster which is reflected in the tax data. Make in India showing results and gaining momentum etc.

(ii) All this will make the fiscal profile much stronger while uncertainty premium will keep rising making long rates artificially high which may make difficult to take a call on long term bond yields. One will keep fearing choppy markets and expect rates to keep rising.

(iii) Yield curve is very steep and pricing in more hikes than what probably may be delivered but as supply of bonds is heavy and RBI may start tightening any time leading to sharp rise in yields

(iv) This phenomena keeps the investors away from long bonds as the fear factor is high. This makes cheap cheaper and rich richer in valuation terms. Very Short end is rich and mid to long end is somewhat cheap.

(v) As there are many factors which are influencing the bond markets and surprises element it also high hence we believe a barbell strategy shall pay rich dividends over time.

(vi) In such scenario Floating rate bonds offer good protection however off late the same has been underperforming as the supply of the bond was high. The supply has led to price fall irrespective to the type of bonds Fix or floating . Effectively we are in a unique situation where fix bonds are discounting rate hikes while floating are discounting rate cuts ( in theory price fall in floating rate bond reflects some kind of fall in rates being expected by the markets)

Q . What is your near to medium-term outlook on the debt market? What is your present investment strategy in the markets?

Answer : We believe as the RBI begins the policy normalisation they yield curve will flatten and large part of adjustment shall be seen in 6-18m segment. This will help FRB hence the FRB component in the portfolio will protect the portfolio in such time. As the rate normalisation is done mid to long bonds will move towards the fair value and hence yield may start easing again.. As per our internal modelling with 5% on repo rate the fair value of the 10 yr will be around 7% so on a rule of thumb if we keep buying dip form current levels of 6.80 and average cost of portfolio is 6.90 then at 7% we get a returns of 6.4% while the overnight will be around 4.5~ . and if we are able ti time even better then gross returns can be above 7% as well.

This calculation is just for understanding purpose and no assurance.

Q . What would you advise debt fund investors to do at present? Where would you like them to invest for a medium to long-term investment horizon?

Answer : Over all we believe we are in an interest rate rising scenario and pure debt will find it tough to generate higher returns. In volatile time will be diff for investors to take equity call too. Therefore hybrids may offer better value for the investors form total tax adjusted returns. As far as pure debt is concerned our strategy is as explained above and portfolio have adequate component of FRB. Investors need not excessively worry about rate hikes as the FRB comp shall start performing once hike starts. Overall volatility shall be used in the benefit of the patient investor. And patient investors shall reap the benefits.

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