Mr. Santosh Kamath
CIO – Fixed Income
Santosh Kamath is Managing Director of Franklin Templeton Fixed Income in India. He oversees the fixed income functions of the locally managed and distributed debt products. Mr. Kamath joined Franklin Templeton Investments in 2006 and has over 16 years of investment and research experience in the Indian asset management industry.
Prior to joining Franklin Templeton, Mr. Kamath was the CIO at ING Investment Management (India) Pvt. Ltd. Fixed Income, responsible for overseeing Fixed Income Fund Management and managing specific funds. Prior to that, he was fund manager at Zurich Asset Management Company (India) Pvt. Ltd., and he was the head of Capital Market Research at CRISIL Ltd. Prior to that, he was the fund manager at Jardine Fleming India Asset Management Ltd., responsible for Research and managing Indian specific funds and Offshore funds. He was also a fund manager at SBI Funds Management Pvt. Ltd.
Mr. Kamath is an electronics and telecom engineer from REC, Bhopal and holds an M.B.A. from XLRI, Jamshedpur.
1) The US Fed has continued to push the policy rates higher in recent years with as many as six hikes since 2015. How has it impacted the domestic debt markets in India?
Primarily, the rate hikes by the US Federal Reserve tend to impact the sentiments of market participants. As the US economic growth has begun to gather speed, rising inflation has prompted speedier rate action. This in turn has started to channelize FPI flows away from emerging markets in this year to chase high yields with better safety. Rising US bond yields and lower demand for domestic bonds have hardened the domestic bond yields, although other domestic macroeconomic factors have also contributed to the hike in yields. The current spread between 10-year US and Indian bond yields hovers above the long term average. Strengthening of the USD has weakened the domestic currency which is additionally weighing on the already precarious deficit situation and exerting upward pressure on inflation. With external borrowings for corporates likely to become expensive, the corporates tapping domestic bond market to raise capital could harden interest rates. We already see Indian banks hiking their lending rates.
2) India has enjoyed subdued inflation levels for quite some time. However many view inflation as the primary risk today for the economy. What is your fund house's assessment on the inflation trend in India?
The RBI has lowered its inflation target on account of the softening seen in prices in the past few months. However, we believe that upside risks to inflation will persist. Inflationary pressures are definitely on the rise and a surge in core inflation suggests a structural shift in the inflation trajectory rather than a transient phase. The core inflation (ex-transport and communication) rose to a 44-month high in April 2018 hinting at initial signs of demand side pressure in the economy. Going forward, food inflation could increasingly contribute to the headline inflation on higher MSP hikes and unfavorable base effect. Rising global oil price and its pass-through effect on the domestic economy would also exert an upward pressure on inflation. Additionally, the recovery in global growth is hardening consumer price inflation in the advanced economies, the ripple effect of which may be seen in the domestic economy as well.
3) What is your assessment of the government's borrowing plan for FY19-H1? How will it likely impact the debt market?
A host of factors including hardening inflation, deteriorating fiscal deficit situation, rise in global bond yields and a sell-off in Indian bonds by the FPIs have muted the demand for government bonds. This has further been validated by a surge in domestic bond yields seen over the past few months. Acknowledging these market sentiments, the government decided to borrow ~48% of its full-year borrowing target in 1HFY19, much lower than the average 1H borrowing of 60-62% over the past many years. The borrowing calendar also surprised the market positively with the tenure and nature of the borrowing. The borrowings composition, as desired, has tilted toward short-end securities. The tenure of g-sec issuances are also favorable, as the government, for the first time has planned to issue securities in the 1-4 years maturity bucket. A third of all issuances will be in the short end of the curve going up to 9 years maturity (as against less than 20% over the past three years). ~10% of the total issuances will be of floating rate bonds and CPI indexed bonds. The limited issuance in H1FY19 could potentially have led to lower volatility in the bond market and increased the scope for private sector borrowings. However, the increased borrowing in H2FY19, possibility for fiscal slippage together with higher borrowing calendar of state governments would nullify the effect of lower H1FY19 borrowing and could create upward pressure on yields going forward.
4) How do you assess the current bond yield levels from the valuation perspective?
The yield curve has flattened considerably over the last few months on the back of tightening liquidity and expectations of rate hikes by the RBI. The shorter end of the yield curve is considerably above the RBI repo rate, and discounts a series of rate hikes. The RBI has started taking steps, primarily OMO purchase, to ease the tightening liquidity scenario. This makes the shorter end of the curve attractive from a valuation perspective. The longer end of the curve is dependent on several factors like the RBI rate stance, fiscal situation, FPI interest, the US Federal Reserve policy moves, domestic currency trend, crude oil price etc. and would continue to exhibit volatility.
5) What is your fund house's credit and duration strategy in terms of managing your flagship debt funds?
Even though the RBI hasn’t hiked key interest rates yet, the interest rates in the economy have begun an uptrend with a rise seen in bank lending rates, CP/CD rates and bond yields. Furthermore, while the credit offtake has grown at ~10%YoY (15-month high) led by retail and corporate loan growth, the deposit growth has slowed to ~7%. Another factor in favor of rate increase is the appreciation in the USD which is set to make external borrowings by large corporates expensive. Their unmet borrowing requirements could also harden domestic rates. Current inflation levels stand below target inflation levels. However, weakness in domestic currency and a rise in oil prices are creating inflationary pressure in the economy. This could cause the RBI to shift to a tighter policy stance.
We expect the RBI to start hiking rates over the next few quarters. Lack of appetite for longer duration bonds by banks has prompted the government to enhance FPI limits for bonds in early April. Additionally, the future direction of long bond yields is likely to be determined by the trend in US bond yields, global liquidity and oil prices. Given these factors, we choose to maintain lower duration in our funds.
6) What would be your advice to investors with short, medium and long term investment horizons in debt funds? Where should they invest?
At current levels, market yields are already pricing in a couple of rate hikes and hence provide a significant cushion for a prospective investor, especially at the short end. From an investment perspective, we continue to remain positive on corporate bond funds and accrual strategies. Investors who are looking for accrual income opportunities may consider corporate bond funds that offer higher yields.
This interview will be published on sites managed by NJ and will be accessible to general public. The interviews will also be shared on NJ Wealth Partner websites managed by NJ. The interview may be published in physical form for internal circulation to NJ Partners and investors. Any disclosures required to be displayed in digital formats /websites are requested to be specifically included in the interview reply.