'Policy interest rates are likely to be kept on hold'2 min read . Updated: 28 Dec 2020, 12:43 PM IST
- Over the coming year, the dynamics of liquidity management may undergo a gradual change with actions likely to modulate the excessively surplus liquidity at the margin, says Radhakrishnan, CIO - Fixed Income SBI Mutual Fund
Rajeev Radhakrishnan, CIO - Fixed Income SBI Mutual Fund, expects headline interest rates to be kept on hold, but says the surplus liquidity of 2020 is likely to be drained out of the system causing money market yields to rise. This could improve yields on debt fund categories such as liquid and ultra short funds that have trailed longer duration debt categories in 2020.
Radhakrishnan speaks to Mint on his outlook for interest rates and yields in 2021. Edited excerpts:
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Interest rate hikes seem to be the largest fear of equity and debt markets for 2021. What is your view on the probability of such hikes happening?
In view of the significant growth shock that has been experienced, the policy priority is likely to focus on a sustainable revival of growth. Hence, it is unlikely that policy rates may be hiked in the coming year. At the same time over the coming year, the dynamics of liquidity management may undergo a gradual change with actions likely to modulate the excessively surplus liquidity at the margin. Overall, the policy interest rates are likely to stay on hold for a while with liquidity conditions incrementally moving to moderate surplus from a stage of excessive surplus.
At the short end, liquid and overnight fund yields have lagged short duration, corporate bond and similar categories in 2020. Will this gap be filled?
This situation may persist for a while as the shorter end rates are influenced by the systemic liquidity. However, a gradual flattening is likely as the surplus incrementally moderates and the RBI interventions peg the long end in a narrow range.
Does roll down maturity still make sense with low yields? Should investors be locking in such yields? If so, what duration is ideal for roll down maturity products?
Roll down products may not provide capital gain opportunities under a situation where the shorter end rates are likely to readjust higher driven by liquidity absorption and eventually a normalisation of an accommodative monetary policy cycle is anticipated. This should be a baseline assumption over the next couple of years for a fixed income investor in India.
Is the corporate bond market ready for low cost debt ETFs?
Similar to trends globally, over time these products would gain more interest. However, the liquidity of the underlying securities as well as secondary market liquidity of units have to increase for the products to remain true to label.