Expert view: RBI rate cuts may lead to a more favourable borrowing environment, says Irfan Mohammed of Aspero

Expert view: Irfan Mohammed, executive director at Aspero, believes if the RBI cuts the policy rate, it could alleviate some pressure on bond yields, potentially leading to a more favourable borrowing environment. In an interview with Mint, Mohammed shared his views on the outlook for the Indian benchmark bond yield and why investors should consider investing in bonds amid a roaring stock market.

Edited excerpts:

What changes can we expect in bond investments in India, with Indian bonds entering major global indices?

The inclusion of Indian bonds in major global indices like JP Morgan and Bloomberg's Emerging Market Local Currency Government Index is a significant development.

We expect this to greatly boost market liquidity as more investors will trade these securities.

Consequently, the government and corporations could benefit from lower borrowing costs due to increased demand from global investors.

We anticipate foreign inflows of $20-30 billion, potentially leading to a 10 per cent weight in the index by March 2025.

This will likely increase foreign bank activity in the Indian bond market, enhancing its overall vibrancy. However, there are considerations to be mindful of.

Increased exposure to global market volatility and the risk of sudden capital outflows during times of global economic uncertainty are potential challenges.

Additionally, higher foreign investments might lead to currency appreciation, which could impact export competitiveness.

Being part of the GBI-EM index shows that India's economy is gaining international recognition and attracting more investments.

While the potential benefits are undeniable, a cautious and well-managed approach is necessary to mitigate the associated risks.

By fostering a stable and transparent investment environment, India can leverage this inclusion to attract long-term capital, lower borrowing costs, and further integrate itself into the global financial system.

What is your outlook for the Indian benchmark bond yield? What will RBI rate cuts mean for them?

The Indian benchmark 10-year bond yield has shown some volatility, recently standing at 7.1069 per cent in early May 2024.

The RBI's decision to hold the repo rate at 6.50 per cent for the seventh straight meeting reflects a cautious approach, balancing economic growth and inflation control.

The RBI projects a 7 per cent economic expansion and 4.5 per cent retail inflation for fiscal year 2025, with food prices posing ongoing risks.

Despite a significant drop in the benchmark 7.26 per cent 2033 bond yield, indicating a potential end to the rate hiking cycle, market participants foresee yields rising due to heavy bond supply and delayed rate cut bets.

The yield curve remains flat, and we anticipate trading within the 6.95 -7.15 per cent range in the near term.

If the RBI initiates rate cuts, it could alleviate some pressure on bond yields, potentially leading to a more favourable borrowing environment.

Why should investors consider investing in bonds amid a roaring stock market?

Investing in bonds during a robust stock market offers crucial diversification benefits.

Bonds, particularly high-quality ones, provide a predictable income stream through interest payments, offering stability even when stock prices fluctuate.

They act as a counterbalance to the volatility of equities, reducing overall portfolio risk. For example, the landscape for high-net-worth individuals has seen some significant shifts recently.

According to the 2024 World Wealth Report by Capgemini, there has been a notable move away from excessive cash holdings towards a more balanced approach that includes increased bonds and real estate allocations.

Last year's uncertainty drove many to preserve wealth through cash, but now we are shifting back towards growth-oriented strategies.

Bonds, in particular, are gaining favour among investors looking to balance risk and returns, especially in a potentially declining interest rate environment.

High-net-worth individuals, especially those with substantial assets, are turning to fixed-income instruments like bond ladders for both stability and tax optimisation strategies.

This trend suggests that amid a buoyant stock market, bonds offer a reliable avenue for wealth preservation and strategic growth planning.

Why have bonds largely remained an overlooked investment tool in India? Do you expect it to change?

Bonds have traditionally been underutilised in India due to several reasons.

Firstly, there has been a lack of awareness among investors about the benefits of bonds compared to more familiar investments like stocks and gold.

Additionally, accessibility has been limited, primarily catering to institutional investors and high-net-worth individuals until recent regulatory reforms aimed at broadening retail participation.

Historically, low bond yields and liquidity issues in the market have also deterred investors from seeking higher returns and easier trading.

SEBI's move to lower the face value from ₹1 lakh to ₹10,000 will significantly democratise access to corporate bonds.

We believe this could increase bond issuance and higher trading activity in secondary markets, enhancing market liquidity and efficiency.

As interest rates are anticipated to decline, bonds could offer attractive returns compared to traditional fixed deposits, making them a compelling option for retail investors looking to diversify their portfolios with stable income and reduced volatility.

With regulatory reforms and several market participants like Aspero making bonds more accessible and attractive yields amid evolving market conditions, there is a growing expectation that bonds will gain prominence in Indian investors' portfolios.

The combination of increased awareness, improved accessibility, and potential for higher returns will mark a significant turning point for bonds in India's investment landscape, aligning them more closely with global investment practices.

What strategy should one follow to get high returns with low risks from bonds?

Investors can explore opportunities beyond AAA-rated companies.

AA and A-rated companies with strong financials, improving profitability, and robust liquidity profiles often provide higher yields.

Evaluating their track record of bond issuance and repayment history can further enhance investor confidence.

Achieving high returns with low risks from bonds requires a well-thought-out strategy.

Firstly, it is crucial to diversify your bond investments across different types of bonds and maturities.

This can include government bonds, high-quality corporate bonds, and municipal bonds.

By diversifying, you spread the risk and can mitigate the impact of any single bond underperforming. Secondly, consider creating a bond ladder.

This involves purchasing bonds with staggered maturities, which can provide regular income and reduce the risk of interest rate fluctuations.

As bonds in the ladder mature, you can reinvest the proceeds into new bonds, maintaining the ladder structure. Finally, focus on bonds with higher credit ratings.

While they might offer slightly lower yields than lower-rated bonds, they come with a significantly lower risk of default.

It is essential to balance the yield with the credit risk to ensure you are not taking on excessive risk for the return you are getting.

Are bonds effective investment tools for retirement planning? How should one plan?

Absolutely, bonds play a crucial role in retirement planning due to their stability and predictable returns. To plan effectively, it is crucial to balance between equity and debt investments.

For those approaching retirement, a higher allocation—around 60-70 per cent—to bonds such as investment-grade corporates and government securities (G-Secs) ensures reliable income and safety.

Diversifying across bonds with varying maturities helps manage interest rate risks and maintains a steady cash flow.

Pre-retirement, investors can optimise for better yields and shorter to medium-term tenors, building a reinvestment pool to compound returns effectively.

After retirement, bonds serve as a passive income source, where optimising interest and principal payment frequency allows for large lump sum investments, ensuring regular income through interest payments while preserving capital.

Younger investors with longer investment horizons may lean towards higher equity allocations (around 70-80 per cent) alongside a smaller bond allocation (20-30 per cent) to capitalise on long-term growth potential while benefiting from the stability bonds offer.

Sovereign Gold Bonds (SGBs) provide an innovative avenue to include gold in a portfolio without storage concerns, enhancing safety and inflation protection.

Maintaining a balanced investment approach with around 30-40 per cent in fixed-income instruments like bonds, G-Secs, and SGBs ensures stability and consistent income.

This strategy, combined with periodic portfolio adjustments based on risk tolerance and market conditions, optimises retirement planning for sustained financial well-being.

Can you please explain Aspero's features to make bond investments attractive for retail investors?

At Aspero, we have innovated several features to enhance bond investments for retail investors.

Firstly, our After Market Orders (AMO) allow investors to trade bonds outside of regular market hours, accommodating busy schedules and increasing convenience.

Over 50 per cent of orders are now placed after hours, highlighting the feature's popularity.

Secondly, Aspero believes in fair and transparent pricing for all our users, and it rewards even higher yields to all users when they invest more.

This approach is expected to boost investment volumes by 35-40 per cent, and we are already seeing early signs of this. Transparency is another cornerstone.

We provide comprehensive insights through one-minute listing videos, Issuer Insights, and Issuer Scorecards, improving investor confidence and engagement.

These initiatives have increased page visits by 30 per cent and enhanced the time spent on our bond detail pages by 62 per cent.

For seamless onboarding, Aspero's Zero-Document Upload KYC simplifies the process without requiring document uploads, reducing traditional onboarding hassles and improving user experience.

Looking ahead, our upcoming cart functionalities will enable investors to create customised bond portfolios, further streamlining the investment process.

As the first Online Bond Private Placement Platform available across the web, mobile web, and app platforms (iOS and Android), Aspero aims to make bond investments as accessible and mainstream as stocks for retail investors.

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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.