bl.portfolio caught up with Rahul Goswami, CIO &MD - India Fixed Income, Franklin Templeton Asset Management, at the fund house’s Chennai office recently. He speaks on what investors can expect on the debt side from the AMC and on his rate cut expectations. Edited excerpts:
After the trouble in its debt funds earlier, what is Franklin Templeton’s agenda in fixed income space in India today?
Franklin Templeton is focused on continuing its India presence in a rock-solid manner. Fixed income is important for FT not just locally, but also globally. Out of $1.6 trillion that we manage globally, close to $600 billion is in the fixed income. And India is one of the finest markets to operate in, with political stability, policy continuity and credible regulators like SEBI and RBI. So, India will play an important part for FT and we are making efforts to further strengthen the overall presence in India including fixed income and improve the market share.
Our strategy is based on the high-grade fixed income side. About 98 per cent of the total AUM in the fixed income side in the market is outside the credit risk fund / credit risk strategies. But over period of time, we may be in a position to offer a more differentiated strategy. However, this will be more of a medium-term approach as we still have many gaps in the current product offerings.
How difficult has it been to get back the confidence of investors on the fixed income side?
Investors are excited and happy about talking to us and knowing that we are back in the fixed income space. And we will be launching a couple of new strategies – which have not been part of the existing suite. The play will be more on the duration and interest rate management, apart from keeping the safety and liquidity non-compromised in these funds. Frankly, I am positively surprised to see that response from investors. That said, they will also take time to wait and see the strategies performing. I am sure that the results of our strengthening the processes, controls, checks and balances, etc. will show in the performance.
On NFOs, will you be going back to some of the categories in which you shut funds earlier?
There are many gaps in our product offering on the debt side as of now. We are analysing what strategies to prioritise so that it gives us a more exhaustive product suite to offer. It may include long-duration strategy, medium to long duration, sovereign bond fund strategies like constant maturity and others on the shorter end like low duration, ultra short-term, short-term, etc.
Are interest rates globally going to remain higher for longer? When do you expect cuts globally and in India?
We can expect some easing in developed markets. Some central banks could be moving earlier than others. If the market pricing is correct, we could see Bank of England and ECB moving first. On the US side, right now the market pricing is probably two rate cuts by end of the year.
As far as India is concerned, the RBI has been more prudent in managing things. The US had to raise rates by about 525 basis points, but India did not have such a large inflation spike as it has been within the tolerance range for some time now. I think the central bank in India would be more wary of the domestic situation rather than relying on the external environment or how other central banks are moving.
But the growth is good, assuming no negative surprise in elections. I think the business confidence should be good and investments should continue. So, demand for money will remain strong. Even now, credit growth is close to 16-17 per cent. With these things, we will probably have a shallow rate-cut cycle at best.
Are you seeing a certain amount of rate cut already being priced in, in India?
Obviously, expectations have been built up. That is why you are seeing such flatness in the yield curve. The flatness is clearly indicative that the market is not pricing any more rate hikes or any more adverse news on the interest rates.
Is it the tightness on the liquidity front, which is seeing the shorter-term yields on par with the longer-tenure ones, also resulting in a flat yield curve ?
I would say it is partly liquidity driven. Part of it is also on account of credit growth being high at 16-17 per cent and deposit growth being much lower. So there is demand for money which will show its impact. As far as the durable liquidity is concerned, which is close to 1 per cent of NDTL (net demand and time liabilities), the RBI will take necessary steps to maintain adequate liquidity so as to support the credit flow to the economy. The last reported number on durable liquidity from the RBI is close to ₹1.8-lakh crore.
And probably, temporary lag in government spending, has lead to the government running surplus in excess of ₹2-lakh crore. So because it is running a surplus, the market liquidity is tight and we have seen the government announcing buybacks to infuse liquidity into the system. I think as and when the government spending gathers pace, this temporary liquidity problem will ease off.
The RBI has been aware of the liquidity conditions and has been actively managing the situation using tools such as the VRR (variable rate repo) auctions
Do you expect short-term rates to remain high in the near future? Across your funds, your average maturity is about two-three years…
I would believe that short-term rates will remain high because the curve is definitely pricing in that liquidity tightness will continue and also the fact that the demand for money will remain elevated.
As far as our funds go, we are relatively underweight on duration. The fact that the yield curve remains flat and part of the monetary easing is already being priced in leads us to believe there is much better value at the short and medium segment of the curve. But we are looking out for opportunities and as and when the valuations become more favourable, we will be adding more duration.