Debt markets have witnessed tremendous turmoil since last week as investors were caught off-guard by the Reserve Bank of India’s off-policy repo rate hike and its decision to remove liquidity through a CRR hike.
With India’s inflation rising to 8-year highs in April, the RBI is seen hiking interest rates much more in the coming months, which means yields on government bonds, are set to climb even further. Bond prices fall when yields rise, resulting in marked-to-market losses for investors.
This would adversely impact the returns of bond funds as the NAV of funds is computed at the prices prevailing on that day.
ETMarkets’ Bhaskar Dutta caught up with Rajeev Radhakrishnan, CIO Fixed Income, SBI Mutual Fund, to understand how bond markets would fare amid these headwinds and what debt investors should do.
1. The sovereign bond market is caught in the perfect storm – the beginning of rate hikes amid heavy supply pressures. Where do you see the 10-year benchmark yield over the near term?
2. What should the strategy be for retail investors in debt funds in the current environment of tighter monetary policy and growth headwinds?
3. The short-end of the yield curve is perhaps the segment that is most affected at the current juncture, given the RBI’s clear-cut intent to reduce the liquidity surplus. The long end carries with it the risk of duration. Which part of the yield curve do you prefer right now?
4. How many more rate hikes should markets brace for? What is your expectation for the terminal repo rate?
Thank you Mr Radhakrishnan for a very intriguing conversation.
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