Amongst the noise and volatility witnessed across asset classes in the last 12-18 months, the India markets have delivered. And for good reason. For an economy which was struggling on various macro parameters as recently as mid 2013, we have come a long way.
What has turned the tide as far as India is concerned is exemplary discipline on the fiscal side, astute monetary policy and adequate supply side responses to control inflation. Inflation in particular has been a big success story which has completely changed the dynamics on the interest rate front.
Global developments such as hugely surplus liquidity conditions and well as the sharp drop in oil and other commodity prices had quickened and amplified these improvements on the macro front.
As we enter 2015, India is rightfully placed to reap the benefits of all the above factors and achieve a reasonably healthy non inflationary trend growth, which is very attractive in the overall domestic as well as global context.
From a interest rate perspective, there is enough ground for supportive monetary policy over the medium term. The inflation, current account and growth dynamics have created space for a further easing of 50 to 100 basis points over the next 12 to 18 months.
Further, structural improvements in liquidity conditions led by reducing current account deficit and a potentially healthy balance of payment surplus, will significantly improve the transmission of these rate cuts to the real economy thereby aiding growth and corporate profitability.
Obviously the cross currents across global markets, competitive currency devaluation in reserve currencies and the unsettled geo political environment will create temporary bouts of volatility across markets including in India, but the marked improvement in macro stability will mean that we will still stand out as one if the best performing markets and economies in years to come.
Given the constructive environment for rates, investors should continue to remain invested in long duration portfolios which will add to their total returns through capital gains over and above coupon returns. Further improvements in domestic macro and growth conditions will help improve the credit profile of India Inc., which in turn can be captured in terms if healthy returns by investing in well researched and well managed corporate bond portfolios. Ideally, investors should have a judicious mix of both these exposures in their fixed income allocations. Happy investing.
-By Amit Tripathi
The author is Chief Information Officer — Debt, Reliance Mutual Fund