Is It Time For Investors To Consider Infrastructure?
KALPEN PAREKH: There is a category called float, out of many categories in the fixed income space, but our observation is that most of them are low-term, six-month, one-year assets that mature. Thus, automatically as they mature, they can be reinvested at the interest rate in effect six months or a year later. Thus, they are not floating in their design, but they end up being variable rate because the maturities are very short. So we launched a floating rate fund in March called the DSP Floater and we saw early interest in it because on the one hand, the interest rates went down, we saw a really big cycle where the bond 10-year Crown peaked at 9.5% in 2013-14 and today is around 6%. On the other hand, overnight rates are at 3-3.4%, money market rates are at 3.5-4%. So we have seen a huge cycle of rates globally as well as in India. On the other hand, all governments around the world as well as in India want to spend a lot of money and the deficits are likely to be much higher than what we have seen in the past. So if you put those two things together, it’s likely that in a year or two the interest rates will be higher than they are today. Number one.
Number two, currently we are sitting on 11 lakh crore of daily cash in the banking system. Usually if you take the last 15 years the first 10 or 12 years India had neutral or negative liquidity in the banking system. The last two, three years due to demonetization and then supporting growth during the Covid period, and to maintain adequate liquidity, we have had this framework of excess liquidity, but at some point the liquidity will start to drain. normalize. So our expectation is that if you look to the future a year from now, not just today, it is possible that not only will liquidity tighten, but rates will start to rise, a very low part of the yield curve. rates will start to increase, and even spreads will widen. You will be surprised to find that AAA bonds and Indian government bonds more or less borrow money at the same rates. Normally the spread is 75 basis points higher for Indian companies because the credit spread will still be there, but due to the excess liquidity the spreads have tightened. So, we thought about creating a contrarian product of a way where the portfolio buys a simple five-year government of India bond for any state development bond, so that’s a sovereign product, it has no credit risk because we don’t want to play the credit cycle right now. When the spreads are practically zero, there is no spread. So why take a credit risk? It’s a five-year sovereign government bond that will automatically mature over the next five years and a year, two years later, its maturity would have declined further. On the other hand, we have designed an interest rate swap so we buy a two-year swap. It neutralizes the duration, so four years is the duration on the long side, and minus two on the soft side, so the net duration is two years today. As we move forward into the next year, the net duration will go down to one year. So that’s how we designed this fund and there is a segment that says we want to plan for the future interest rate cycle that is likely to unfold. We don’t mind having a certain percentage of our portfolio in a product like this which is sovereign in nature where liquidity is not an issue. Remember, corporate bonds: Liquidity can dry up overnight when the cycle turns around, when liquidity starts to fall, when the rate cycle turns around. Even AAA bonds sometimes have an impact cost. So we have created a very conservative fund at the moment and the fund is about 2,000 crore in size. I wouldn’t say people are lining up to invest in this, but savvy investors are wondering if I want to protect myself against rising interest rates one or two or three years down the road, if that hike in l inflation is permanent and if I want to hedge my portfolio with fixed income, can this be a good product for that?