Mr. Amit Tripathi

CIO - Fixed Income, Nippon India Mutual Fund

Amit has 27 years of experience in Capital Markets. He has been with NIMF for more than 20 years. He has successfully managed fixed income and hybrid funds for the past two decades. Many of these funds have been recognized for superior performance both nationally and internationally. In his current role as CIO- Fixed Income, he leads a team of 22 highly motivated and experienced fixed income professionals.

Q1. Following the policy announcement, why did the bond markets initially react with disappointment, despite yields rising a few basis points?

Bonds markets reacted with disappointment post first rate cut as the move was already priced in by the market. Absence of any specific announcement with respect to liquidity measures even as the RBI guided to ensure sufficient system liquidity coupled with absence of change in stance led to spike in bond yields.

Q2. With two major events-the Union Budget and the highly anticipated rate cut-now behind us, what are your expectations for yields?

Given the good performance of long-term bond yields over the last 12-18 months risk-return trade off appears in favour of short end of the curve i.e 1-5 year. Liquidity easing measures by the RBI may lead to steepening of the yield curve, leading to lower yields at short end of the curve across assets. While a conduct of OMO purchase by the RBI is positive for 10-year benchmark GOI bond. Any incremental deterioration in growth and further rate cuts by the RBI and fall in US bond yields may be positive for long duration.

Q3. How are your debt funds positioned in terms of duration? Have the recent policy updates led to any adjustments?

We have made no changes in the duration and are on the higher side of the duration in the intermediate duration fund category to benefit from the potential rate cuts and liquidity easing measures.

Q4. What according to you were the key takeaways from the governor's speech?

• Given the current growth-inflation dynamics, the MPC felt that a less restrictive monetary policy is more appropriate at the current juncture.

• MPC to use the flexibility embedded in the inflation targeting framework while responding to the evolving growth-inflation dynamics.

• To proactively take appropriate measures to ensure orderly liquidity conditions.

Q5. What advice would you give investors on positioning their fixed-income portfolios considering the budget announcements and the RBI rate cut?

Given a marginal term spread, between 5 and 10-year GOI bonds at around 4 bps, with the 5 year GOI bond currently hovering around 6.65% and the 10-year GOI bond at around 6.69% we expect term spread to widen. Further, the yield of the AAA rated 3- and 5-year corporate bonds currently stands at around 7.30% and 7.26%, respectively, as compared to the 6.63% and 6.65% yield of the GOI bonds of the same tenure. Thus, offering an opportunity of spread compression of corporate bonds over GOI bonds. Further liquidity infusion may soften the yields at short end of the curve.

Accordingly in line with the current market dynamics around 70%-75% of the allocation may be considered at intermediate duration (which invests in 3-5 yr corporate bonds and 5-10 yr g-secs), such as short term funds, corporate bond fund, low duration fund, Banking & PSU debt Fund. and remaining 25%-30% at the long end of the curve.

Mr. Nimesh Chandan

Chief Investment Officer - Fixed Income India

Bajaj Finserv

Nimesh Chandan is an Investment Professional with 22 years of experience in investing in the Indian capital markets. He has an established track record in managing money and advising clients, both Domestic and International, Retail as well as Institutional.

Over the years, he has developed an investment process that generates alpha through informational, analytical as well as behavioural edge. He has been part of the mutual fund industry for 18 years where has managed products across market capitalisation and themes, and developed models on Sustainable Investing, Quant Investing and Asset Allocation..

Nimesh is a keen follower of Behavioural Finance and has been writing and presenting on the role of psychology in Investment Decision-making to the investment community. He has developed a set of processes and tools that help reduce one’s behavioural mistakes and understand the crowd or market behaviour.

Q1. A major event in the US is the potential return of Trump with "Trump 2.0." How do you think this could influence US monetary policy, and what impact might it have on interest rates globally?

The potential return of Trump with "Trump 2.0" could bring significant policy shifts, impacting global markets and monetary policy indirectly. His administration's platform of improving government efficiency and reducing budgetary expenditure could influence fiscal policy, possibly curbing certain government programs to manage deficits. However, pro-business policies, including deregulation and tax incentives, might stimulate economic growth, potentially leading to inflationary pressures that the US Federal Reserve would need to monitor closely.

Key uncertainties, such as tariffs, visa policies, and inflation, add layers of complexity. Trade restrictions or tariff uncertainty could disrupt global supply chains, increasing costs and fueling inflation, while visa policy changes might impact labor markets and productivity. These factors could lead the Federal Reserve to adopt a cautious stance, balancing growth support with inflation control. For now, a "wait and watch" approach is prudent as the situation evolves, keeping a close eye on data and developments that could shape interest rates globally.

Q2. In 2024, the US Federal Reserve reduced interest rates by 100 basis points, yet the US 10-year bond yields have risen by about 70-80 basis points. Meanwhile, despite the Reserve Bank of India not cutting rates, the 10-year G-Sec yield posted its steepest decline in four years in 2024. The yield ended at 6.7597%, dropping 42 basis points on-year after easing 15 bps in 2023. How do you interpret these developments in the context of both economies?

Some of the reasons for rising US 10 year bond yields are:

• Economists initially projected 1.2% growth for 2024, but this estimate more than doubled to 2.7% by year-end. Stronger-than-expected growth reduced the likelihood of further Federal Reserve rate cuts, pushing yields higher.

• Economic uncertainty continues to drive yields upward, with lingering questions about the Fed's future rate path and the potential inflationary impact of new administration policies.

• If markets anticipate higher future inflation, long-term bond yields may rise, regardless of rate cuts.

Some of the factors attributing to falling 10 year G-Sec yields are:

1. Easing Inflation: India's retail inflation moderated significantly in 2024, reducing pressure on yields.

2. Global Impact: Falling US Treasury yields earlier in the year and expectations of global monetary easing improved risk sentiment, benefiting Indian bonds.

3. Foreign Inflows: Improved global liquidity conditions likely attracted Foreign Portfolio Investors (FPIs) to Indian debt markets, strengthening demand for G-Secs.

4. Supply Management by RBI: Proactive Open Market Operations (OMOs) and bond-buying programs by the RBI ensured smooth absorption of government borrowing, keeping yields under control.

Q3. What are the key risks that fixed income investors should be mindful of?

1. Interest Rate Risk: When interest rates rise, the price of existing bonds tends to fall, leading to potential capital losses. This is a key risk for investors holding longer-duration bonds. Short-duration bond funds or those focused on floating-rate securities can help mitigate this risk.

2. Credit Risk: This refers to the risk that the issuer of the bond may default on its interest payments or principal repayment. For investors in corporate bonds or lower-rated bonds, it's essential to assess the creditworthiness of the issuer. Opting for funds focused on high-quality, investment-grade bonds can reduce exposure to credit risk.

3. Inflation Risk: Inflation erodes the purchasing power of fixed income returns. If inflation rises significantly, the real return on fixed income securities may turn negative. Investors looking for protection against inflation may consider inflation-linked bonds or funds with exposure to sectors that tend to perform well in inflationary environments, such as government securities or short-duration bonds.

4. Liquidity Risk: Some fixed income securities, particularly those in less liquid markets, can be difficult to sell quickly without a loss in value. This risk is more relevant for investors in lower-rated or illiquid bonds. Funds that focus on more liquid, high-quality bonds can help mitigate this risk.

5. Reinvestment Risk: This arises when interest or principal payments from bonds need to be reinvested, but prevailing interest rates are lower than when the original investment was made. Investors can mitigate this by opting for laddered bond strategies or funds that actively manage reinvestment opportunities.

Q4. What investment strategies would you recommend for investors at both the short end and long end of the curve in 2025?

Investment strategies for 2025 should consider the prevailing macroeconomic environment, interest rate trends, and individual investor objectives. At the short end of the curve, the focus is typically on managing liquidity and capital preservation. Investors may look to take advantage of opportunities that offer stable returns with lower interest rate sensitivity, keeping duration relatively short to mitigate volatility risks. This approach is particularly suited for those with a shorter investment horizon or those seeking to park funds temporarily.

For the long end of the curve, strategies would likely depend on the trajectory of interest rates and inflation expectations. A stable or declining rate environment could provide opportunities to lock in higher yields for the long term, benefiting from potential price appreciation. However, long-duration investments carry higher interest rate risks and may be better suited for investors with a longer horizon and a greater tolerance for volatility. Across both ends, diversification and alignment with individual financial goals remain key to navigating market uncertainties effectively.

Q5. With the RBI raising its inflation projection and lowering its GDP growth forecast for the current fiscal year, what is your outlook on economic growth? Do you believe it can pick up in the second half of this fiscal year?

The RBI's decision to raise its inflation projection and lower its GDP growth forecast reflects the challenges posed by persistent inflationary pressures and global uncertainties. These adjustments suggest a cautious economic environment where growth might face headwinds in the near term due to higher costs, subdued external demand, and tighter monetary conditions.

That said, economic growth in the second half of the fiscal year could pick up, supported by factors like a good festive season, strong government spending, and resilient domestic demand. Additionally, easing inflationary pressures, if achieved, could improve consumer and business sentiment, fostering a recovery in key sectors. However, much will depend on external factors like global growth trends, geopolitical developments, and commodity price movements. A balanced and measured approach remains crucial for navigating these evolving conditions.

Mr. Nimesh Chandan

Chief Investment Officer - Equity

Bajaj Finserv

Nimesh Chandan is an Investment Professional with 22 years of experience in investing in the Indian capital markets. He has an established track record in managing money and advising clients, both Domestic and International, Retail as well as Institutional.

Over the years, he has developed an investment process that generates alpha through informational, analytical as well as behavioural edge. He has been part of the mutual fund industry for 18 years where has managed products across market capitalisation and themes, and developed models on Sustainable Investing, Quant Investing and Asset Allocation..

Nimesh is a keen follower of Behavioural Finance and has been writing and presenting on the role of psychology in Investment Decision-making to the investment community. He has developed a set of processes and tools that help reduce one’s behavioural mistakes and understand the crowd or market behaviour.

Q1. As we begin 2025, how do you expect the year to unfold in comparison to 2024?

As we begin 2025, it's important to acknowledge the uncertainty inherent in predicting market outcomes at this stage. Event risks, including geopolitical developments and global economic shifts, remain key factors that could influence market performance. Domestically, the Union Budget will be a significant event, with potential measures to drive growth, investment, and consumption. However, it's too early to gauge the full impact until we see the details of these announcements.

The policy rate outlook will also play a pivotal role, with both the Reserve Bank of India (RBI) and global central banks navigating a balancing act between inflation control and economic growth. For now, views on how 2025 will compare to 2024 remain fluid and will solidify further after critical economic data is released in March, including corporate earnings and macroeconomic indicators. As always, our focus remains on navigating these uncertainties while identifying opportunities to deliver consistent, long-term value for our investors.

Q2. In this new year, one major event to watch for is the budget. What do you anticipate will be the key focus areas for the government this time?

The Union Budget this year is likely to focus on driving economic growth while maintaining fiscal discipline. The government may announce measures to boost rural development, agriculture, and infrastructure to support inclusive growth and job creation. Investments in sectors like renewable energy, manufacturing, and affordable housing could be prioritized to align with long-term economic goals. Additionally, tax reforms and incentives for individuals and businesses may aim to stimulate consumption and investment.

Another key area could be measures to encourage private sector participation and ease of doing business, particularly through PLI (Production Linked Incentive) schemes and MSME support. Continued emphasis on digital transformation, healthcare, and education is also expected, given their critical role in sustaining India's growth momentum. We will be closely analyzing these announcements for their potential impact on market sectors and corporate earnings to align our portfolios with emerging opportunities.

Q3. With the recent market correction in both BSE and Nifty, is this an opportunity for investors to enter the market or increase their existing positions?

The recent market correction in both BSE and Nifty can offer a good opportunity for investors, but the approach should be tailored to their risk-taking capacity and investment goals.

1. Low-Risk Investors: For conservative investors, market corrections can present opportunities to add positions in large-cap, stable companies with strong fundamentals and consistent earnings. These stocks tend to be less volatile and provide steady returns over time. Our large-cap fund with a focused strategy could be a suitable option here.

2. Moderate-Risk Investors: For investors with a moderate risk appetite, this market correction may offer opportunities to invest in a mix of large-cap and mid-cap stocks, which have growth potential but come with slightly higher volatility. Our large and mid cap fund with moat investing strategy and which invests a minimum of 35% in each of large and mid cap stocks, could help capture upside while managing risk.

3. High-Risk Investors: For those willing to take on more risk, market corrections can present attractive entry points into sectoral and thematic funds. We have 2 offerings in the sectoral and thematic space - consumption and healthcare fund, which could be suitable for high risk investors.

Key Factors to consider:

• Market Volatility: While corrections offer opportunities, markets can remain volatile in the short term. It's important to maintain a long-term perspective to avoid making decisions based on short-term market movements.

• Risk Diversification: It's essential to not concentrate investments in just one or two sectors. Diversified equity funds offer a balanced approach to manage risks while participating in market growth.

• Fundamental Analysis: Ensure that investments are being made in fundamentally strong stocks or sectors with robust growth potential, rather than being swayed solely by market price movements during the correction.

This market correction presents a good entry point for investors based on their risk profiles, and mutual funds offer an efficient way to diversify across sectors and market caps, aligning with both conservative and growth-oriented strategies.

Q4. Is the popularity of index and factor-based passive funds a passing trend, or do they represent a sustainable and enduring investment approach?

The popularity of index and factor-based passive funds is not a passing trend but rather represents a sustainable and enduring investment approach. The rationale behind this assertion can be framed within the following key points:

• Cost Efficiency
  Passive funds, whether index-based or factor-based, offer significantly lower expense ratios compared to actively managed funds. With the growing awareness of costs impacting long-term returns, investors gravitate toward these cost-efficient solutions, especially in efficient markets where alpha generation is challenging.

• Empirical Evidence on Factor Premiums
  Factor-based funds tap into well-documented sources of return, such as value, momentum, quality, size, and low volatility. These factors have been empirically proven to deliver risk-adjusted outperformance over the long term, aligning with evidence-based investment approaches.

• Diversification Benefits
  Index funds offer diversification across various sectors, commodities and styles, while factor funds allow targeted exposure to specific risk premiums, enhancing portfolio construction flexibility and resilience against individual stock or sector-specific risks.

The growing popularity of passive funds in India is driven by their structural advantages, including transparency, cost-effectiveness, and alignment with evolving investor preferences. These factors position them as an increasingly integral part of modern portfolio management in the country.

Q5. Which sectors are you currently underweight on and which ones are you bullish about for 2025, and what's driving your stance?

We are currently bullish in the Consumption, Healthcare and IT sectors.

Consumption: We are bullish on the consumption sector due to India’s strong domestic demand and demographic advantages. Rising disposable incomes, urbanization, and a growing middle class are driving robust demand for consumer goods and services. Additionally, government initiatives such as rural development programs, increased infrastructure spending, and welfare schemes are boosting rural consumption. Companies in this sector also benefit from improving supply chain efficiencies and innovations in e-commerce, further enhancing profitability and growth potential.

Healthcare: India's healthcare sector presents a compelling investment opportunity due to structural tailwinds such as rising health awareness, increasing healthcare spending, and an aging population. The sector benefits from both domestic and global demand for pharmaceutical products, medical devices, and healthcare services. Government policies like Ayushman Bharat and incentives for pharmaceutical manufacturing bolster the sector's prospects. Additionally, India's established position as a global pharmaceutical hub, supported by cost-efficient production and strong R&D capabilities, provides further upside for long-term growth.

IT: The IT sector remains a cornerstone of India’s economy, driven by its dominant position in global IT services and digital transformation trends. The sector benefits from a growing demand for cloud computing, AI, cybersecurity, and data analytics. Strong client spending in key geographies like the US and Europe supports revenue growth. Moreover, the sector is positioned to capitalize on emerging opportunities in platform-based solutions and digital engineering. The favourable currency movement and India’s cost advantage in talent acquisition also contribute to the sector's sustained profitability and growth.

Currently, we are underweight in the Utility, Metal and Financial Services sectors.

Q6. The New Year marks a time for fresh starts, and if someone were to begin anew with a capital of Rs 10 lakh, how would you recommend they proceed, particularly if they have a moderate risk appetite? What would be an ideal asset allocation strategy in this case?

For someone with a moderate risk appetite and a capital of ₹10 lakh, the focus should be on achieving a balance between growth and stability while aligning the investment strategy with their long-term goals, time horizon, and liquidity needs.

An ideal asset allocation for moderate risk would typically involve diversification across equity, debt, and other asset classes. Equity investments can provide growth potential, while fixed-income instruments offer stability and consistent returns. Depending on the individual's financial objectives, a portion could also be allocated to alternative assets like gold for added diversification and inflation hedging. Periodic reviews of the portfolio are crucial to ensure that it remains aligned with market conditions and personal goals, making this strategy adaptable and future-ready.

Mr. Rahul Goswami

Chief Investment Officer & Managing Director - Fixed Income India

Franklin Templeton Asset Management (India) Pvt. Ltd.

Rahul Goswami is Chief Investment Officer (CIO) and Managing Director at Franklin Templeton, Fixed Income in India. In this role, Rahul oversees the fixed income functions of the locally managed and distributed debt schemes of Franklin Templeton Mutual Fund. Rahul was previously the CIO - Fixed Income at ICICI Prudential Asset Management (I-Pru) and a key contributor to the success of I-Pru’s fixed income funds in India. Prior to I-Pru, he was a member of the Franklin Templeton India Fixed Income team, serving as portfolio manager from 2002 to 2004. Rahul also brings a wealth of experience from his time at well-regarded banks such as Standard Chartered Bank and UTI Bank. He has over 25 years’ experience in managing fixed income funds.

Rahul earned his M.B.A. and his bachelor’s degree in science from Bhopal University.

Q1. RBI announced a 50-basis-point reduction in the Cash Reserve Ratio (CRR). How do you assess the impact of this move, especially in the context of rising global geopolitical tensions and inflationary pressures?

The CRR reduction to 4.00% in two tranches of 25 bps each is a move towards restoring the ratio to pre-April 2022 levels. The move is aimed at releasing approximately ₹1.16 lakh crore of primary liquidity into the banking system. RBI in its latest policy meeting suggested that the systemic liquidity is expected to tighten due to tax outflows, increase in currency in circulation and volatility in capital flows. This reduction is to enable banks to continue credit to businesses and consumers, leading to increased investment and consumption. Domestically, inflation has remained mostly within the RBI tolerance band and the volatility exhibited by the headline inflation is due to intermittent spike in vegetable and food prices and to an extent due to unfavorable base effects. Thus, we believe that the additional supply of money is not expected to be inflationary but only to compensate for the reduced liquidity.

Q2. With the RBI maintaining the status quo on policy rates in this month’s MPC meeting, what is your outlook for the next monetary policy review? Is a rate cut on the cards in February? If so, what could be the magnitude of the cut?

Policy moves by the RBI are determined by growth-inflation dynamics and macro stability. While the latest growth outlook for full year FY25 was tempered by 60 bps to 6.6%^ (Source: RBI Monetary Policy Committee dated 6^th Dec 2024), it was largely a result of lower-than-expected GDP growth in the Q2FY25. Average real GDP growth, as per RBI projection, for the next four quarters i.e Q3FY25, Q4FY25, Q1FY26 and Q2FY26 are expected to be above 7%. At this juncture, it wants to remain prudent and practical and does not want the intermittent spike in headline inflation due to food prices volatility to spillover into other components of the inflation basket. It is difficult to predict the exact timing of rates cuts by the RBI, but we assess rate cuts in India to be shallow with two or three cuts of 25 bps each in CY 2025.

Q3. Will US 10-year bond yields cross 5% again? If yes, what would be its impact on emerging markets like India?

Looking at probable fiscal situation and growth-inflation dynamics in US, the neutral level for 10yr bond yield is in the range of 4.50-5.0%. This increase in US bond yields may pose challenges for emerging markets, as their bond yields must offer a suitably attractive rate of return. To make investing in these markets reasonable, one must consider hedging costs and ensure a return that surpasses the 4.5-5.0% yield of US bonds.

Q4. The RBI's downward revision of the GDP forecast to 6.6% from 7.2% raises concerns about the pace of economic recovery. Do you believe the Indian economy is on track to achieve its potential, considering current economic indicators?

RBI assesses the domestic activity to bottomed out in Q2:2024-25. In our assessment India's real GDP growth in Q2 at 5.4% is an aberration. The low GDP number is due to slowdown in industrial growth, particularly in manufacturing, mining, and electricity. However, high-frequency indicators suggest recovery, driven by strong festive demand and improved rural activities. Agricultural growth is supported by a healthy kharif crop and better rabi sowing. The services sector continues to expand robustly. Real GDP growth for 2024-25 is projected at 6.6%^, with Q3 at 6.8% and Q4 at 7.2%, indicating a resilient outlook. The next year’s quarterly growth outlook is estimated at 6.9% in Q1FY26 and 7.3% in Q2FY26. Overall, we feel that the growth might bounce back from the lows of Q2FY25 due to increased government spending and aided by strong high frequency indicators.

Q5. In light of a strong dollar and its global repercussions, how do you see currency movements affecting Indian investments?

RBI has been aware of the repercussions of a strong dollar and has been proactive to intervene from time to time. Financial markets have remained edgy amidst the rising US dollar and hardening bond yields, resulting in large capital outflows from emerging markets. Going forward, the outlook is clouded by rising tendencies of protectionism which have the potential to undermine global growth and push inflation higher. India, like other emerging markets is also likely to see volatility in asset prices.

Q6. We are in the last month of the year 2024 – any key learnings you would like to share?

We began the year with continued geopolitical risk amidst two ongoing wars. Then, developed economies started lowering rates, beginning with the European Central Bank, followed by the Bank of England. In September, the US Fed delivered a higher-than-expected cut of 50 bps, followed by two more cuts of 25 bps each (Source: US Federal Reserve Monetary Policy Documents dated 18^th Sept, 7^th Nov, 18^th Dec 2024), cumulatively bringing down the rates by a full percentage point. Additionally, a Republican sweep in the US elections may lead to tariff changes and tax cuts, potentially causing disruptions and inflation. These factors have effectively added an element of uncertainty to the financial markets. We believe that the volatility we have seen in 2024 might continue for some more time, and therefore, we need to remain prudent and agile in our actions to rebalance our investment portfolio from time to time.

Disclaimer: This document has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The sector, instruments and securities mentioned herein are for general assessment purpose only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. Past performance may or may not be sustained in future. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this document.

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