Mr. Shriram Ramanathan

Head of Investments for Fixed Income and Fund Manager, L&T Mutual Fund

Mr. Shriram Ramanathan oversees the management of more than Rs 30,000 cr in assets across various fixed income funds. He has been with L&T Investment Management since June 2012 and has over 18 years of experience in fixed income markets.

Prior to joining L&T Investment Management, he was Portfolio Manager at Fidelity (FIL) Fund Management. In his previous roles, Shriram was managing the Global Emerging Market Debt (Asia) at ING Investment Management Asia Pacific in Hong Kong for about 5 years. His earlier assignments were with Zurich Asset Management Company in fixed income research and with the Treasury department of ICICI Bank, where he started his career in investments in 2000.

Mr. Ramanathan is a Chartered Financial Analyst and holds a Post Graduate Diploma in Business Management from XLRI Jamshedpur and an Engineering degree from the University of Mumbai.

Q. Please explain to our readers about the "calibrated tightening" stance of the RBI? What does it mean and how will it impact the interest rates?

Answer: The Monetary Policy Committee (MPC) in the October policy changed the stance from “Neutral” to “Calibrated tightening”. In their post policy media interactions, the MPC clarified that calibrated tightening meant that the next move for the MPC would either be a hold or a hike, but not likely to be a cut. The backdrop for the October MPC was one of very weak macros, with brent crude at a high of 85$/ barrel and INR-USD depreciating to a low of 73.60. Given the concerns around how these might impact our fundamentals, the RBI MPC’s change in stance to calibrated tightening led the markets to believe that the probability of a hike in the upcoming policies had increased.

The past two months i.e. Nov- Dec, however, has seen a complete reversal of the moves in brent and INR. Food inflation too has collapsed, resulting in CPI undershooting market expectations by a wide margin. While RBI MPC in its December policy meeting chose to maintain their “calibrated tightening” stance, we do expect that this stance will change back to “neutral” in the next MPC meeting in February. The resignation of Dr. Urjit Patel and subsequent appointment of Mr. Shaktikanta Das as the RBI governor further increases our conviction further of the likely change in stance to neutral.

Q. The RBI in its last review, kept the policy rates intact. What is your assessment of how interest rates will behave /move in the year 2019?

Answer: The MPC, in its December policy meeting, kept the Repo rate on hold, maintaining its stance of “calibrated tightening”. The last 3 CPI inflation readings have been lower than the 4% CPI target, and the MPC’s own CPI projections have been marked down significantly to 3.8-4.2% for H1 FY2020. Another notable event post the December policy has been the resignation of Dr. Urjit Patel from the post of RBI Governor. The Government has been quick to announce the appointment of Mr. Shaktikanta Das as the new RBI Governor.

The drastic change in the macro backdrop, along with the change in RBI governor, gives us the confidence that the MPC will go ahead with a change in stance back to “Neutral” in the Feb policy. Large scale OMO purchases by the RBI, has ensured that the demand supply situation for government bonds has become very favorable. We expect a downward bias in the 10 year G-sec towards 7-7.25% range. The rates market in 2019 will take further cues from the government’s fiscal management, the general election in May-19, continuity of Open Market Operations (OMO) purchases from RBI to give durable liquidity, sustainability of lower food inflation from Apri-19 and behavior of already higher core inflation.

Overall, we remain positive in our outlook for the bond markets and expect yields to move lower in the coming year.

Q. On inflation side, it looks that things have moderated, especially with lowering of crude oil prices. How do you assess the situation on ground and what are your views on same going forward?

Answer: The past few readings of CPI have surprised on the downside, with food inflation continuing to surprise on the lower side, although core inflation continues to remain elevated in the 5.5-6% range. The favorable global backdrop, with oil prices remaining benign and growth having a downward bias in various regions of the globe – all point to a favorable scenario for CPI globally. Locally, for India, the big disinflation driver is food prices. Although the government did announce large MSP hikes, the same has not translated into higher food prices yet.

Given this backdrop, the RBI MPC lowered its inflation forecasts sharply in its Dec meeting, down to 2.7-3.2% in H2 FY19 (vs 3.9-4.5% earlier) and for Q1/H1 FY 20 from 4.8% to 3.8-4.2% in H1 FY20. While such a sharp revision would seem to have warranted a change in stance to neutral, the MPC noted that the unexpected softening of food inflation and the collapse in oil in a relatively short period of time (and with much higher implied volatility) necessitates further monitoring over the next few months, to confirm if both of these are indeed durable and sustainable or are overdone due to transitory factors.

While CPI is likely to move gradually back to the 4-5% range by middle of 2019, it is still likely to be comfortably within the CPI target range of 2-6%.

Q. Is there any change in the way fund houses have been approaching the debt markets today vis-a-vis the past, say one year ago?

Answer: On the broad interest rate call, the industry has gradually turned from an extremely bearish view to a more positive one recently. At L&T Mutual fund, we moved from an underweight duration stance to overweight duration in 1 ^st week of November, and have been able to capture a majority of the move lower in yields. We remain positive in our outlook for interest rates going forward.

On the credit side, the recent events around IL&FS followed by the NBFC / HFC fiasco, have made mutual funds more careful about their own investments, risk guidelines and internal credit processes. At L&T Mutual Fund, we have always followed a process of internal ratings for each and every name in our investment universe, where our credit team assigns a long term as well as a short term rating to the issuer, and this has been an important contributor for us being able to avoid cases of serious downgrades / defaults across our debt funds. Our reliance on external ratings has always been minimal, although the insights from rating agency analysts are very valuable. We believe that a majority of the mutual fund industry is also likely to move towards such an approach, if they are not already following it so far.

Another core philosophy of L&T Mutual fund has been to clearly distinguish between high quality funds (where credit risk is kept to a minimum), versus the credit oriented funds, so that investors can consciously choose which type of fund suits their risk profile and return aspirations. This is another trend that, in our view, is likely to gain traction across the industry.

Q. What has been your investment strategy - both on the duration side and credit side in the current markets?

Answer: We expect the current positive sentiment in bond market to sustain. We had moved from a cautious, short duration stance across our various funds, to an overweight duration approach (in 1st week of November), as suitable within each fund category. We continue to remain overweight duration given the positive takeaways from the recent MPC meeting.

As far as credit funds are concerned, while some amount of caution is warranted, we believe the current market environment also offers very good opportunities. A fund manager can get very attractive spreads for relatively lower risk, compared to the past few years where credit spreads had become extremely unattractive. While we were cautiously maintaining higher cash levels till October, lately we have started deploying these funds into attractive yielding securities in the AA space. Credit spreads have widened significantly and offer good value.

Q. What would you advice to an investor looking to invest in debt funds for medium to long term? Where should he invest?

Answer: With tail risks of sharp bond market selloff abating, we believe the current interest rates across various fixed income products are quite attractive for investors. The L&T MF approach of keeping high quality funds such as L&T Ultra Short Term, L&T Short Term Bond Fund, L&T Triple Ace bond fund invested only in the top quality AAA papers ensures that credit risks in these funds are kept at a minimum, and we would advise investors to start looking at these segments gradually, given the attractive level they offer.

From a 3-5 year perspective, we believe investors who can absorb near term volatility, could gradually allocate a portion of their long term savings to debt products which invest in the longer end of the AAA corporate bond curve such as the L&T Triple Ace Bond Fund. We believe such a strategy should do quite well, especially compared to investing in tax free bonds or long term FDs where current yields are quite unattractive. Similarly, for investors with risk appetite for credit oriented funds, we believe that such accrual funds offer good value proposition, with portfolio yields at elevated levels.

NOTE:

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L&T Ultra Short Term Fund - An open ended ultra-short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 months to 6 months (please refer to page no.16 under the section “Asset Allocation Pattern” in the SID for details on Macaulay’s Duration)
This product is suitable for investors who are seeking* • Generation of reasonable and stable income and liquidity over short term • Investments predominantly in highly liquid money market instruments, government securities and corporate debt
*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

L&T Short Term Bond Fund (Formerly known as L&T Short Term Opportunities Fund) - An open ended short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years (please refer to page no.16 under the section “Asset Allocation Pattern” in the SID for details on Macaulay’s Duration)
This product is suitable for investors who are seeking* • Generation of regular returns over short term • Investment in fixed income securities of shorter term maturity
*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

L&T Banking and PSU Debt Fund - An open ended debt scheme primarily investing in debt instruments of banks, public sector undertakings, public financial institutions and municipal bonds:
This product is suitable for investors who are seeking* • Generation of reasonable returns and liquidity over short term • Investment primarily in securities issued by Banks, Public Sector Undertakings and Public Financial Institutions and municipal corporations in India
*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.