Interest rates will have a mild upward bias because growth is strong, along with inflation: SBI Mutual Fund

India’s largest fund house with an AUM of INR 8 lakh Crores has a model currently that is positive on fixed income & negative on equities.

Justification

• The Fund house usually has a benchmark model of 50:50 debt allocation, but right now the model prefers fixed income & underweight by 20%  equity.

• The model focuses on 3 dynamic variables namely Earnings, valuations & investor sentiment which are positive, expensive & neutral to positive respectively currently.

• A/c to the company, once the retail investors start seeing rate cuts by RBI, the investors will benefit from capital appreciation along with higher yield, leading to large inflow into debt products.

• Currently, RBI needs to tackle with surge in cereal & vegetable prices, a rate hike i.e ‘Mild-upward bias’ of interest rates heading to next year, being the last resort to control inflation, which is 4% above RBI’s target rate.

• The yield might also rise with the expectations of India being included in the Global Bond Indices, leading to foreign portfolio flows into Indian government securities.

• The US Fed, with the Japanese being the biggest investors, is likely to keep higher interest rates, but Bank of Japan’s yield curve policy is another event to watch.

  • If the Bank of Japan increases yield, the money will start flowing out of US treasuries into Japanese Government Bonds, further pressurizing the yields.

• SBI mutual funds says it prefers more large cap stocks compared to small cap stocks, with small caps being heterogeneous in nature.