With every passing day, the talk of hike in rates is getting louder. How do you read the position? You think we are coming in a tight circle?

Bond markets around the world are already pricing in hopes of a hike in rates. In India too, aggressive rate hikes are being made. We are already seeing the normal phase of liquidity. Thereafter, the repo/reverse repo corridor may be eased by increasing the reverse repo rate over the next few months, followed by an adjustment in the monetary stance to neutral. We expect the repo rate hike to happen in mid-CY 2022.

How long will it last? Generally, the softening or hardening of rates lasts for at least two years.
Interest rate cycle longevity is a function of economic health. The post-pandemic phase is likely to see a strong rebound which will sustain the normalization/tightening cycle for at least a few years

when do you see reserve Bank of India Hiking Rates? How much do you see policy rates going up in the coming year?
The IRS is pricing the market (interest rate swap) over 100 bps of the repo rate hike over the next 1 year. We are of the view that the rate hike cycle may be more gradual in nature.

What other measures of RBI can keep rates higher in the coming year?
India enjoys better real rates as compared to most other countries. Apart from hike in benchmark rates, RBI has other tools like OMO sale, CRR hike etc. While these are mainly liquidity management tools, they also affect the yield curve.

Should investors stay in short term funds? Which other debt funds can they choose?
Investors should try to match their investment horizon as close to the duration of the fund. This allows for greater tolerance instability, Fixed-income investors are likely to focus more on portfolio carry than capital gains. Hence short to medium term funds can be an option

Many people are betting on floating rate funds. A lot of people continue to bet on banking and PSU funds and corporate bond funds. How will these schemes perform in a rising rate environment?
Floating rate funds primarily invest in floating rate instruments. These act as a natural hedge when interest rates rise as the coupon is reset from time to time. Hence, such funds can be considered in such a rate scenario. Banking PSU/Corp Bond Funds are generally short to medium duration with high grade portfolio. so they could have suitable wells considering the need to carry the produce

Should investors in long debt funds and gilt funds stick to their investments during the rate hike cycle to maximize their returns?
It may not be needed. Fund houses are positioning such strategies combining mid-term assets, floating rate instruments, etc. to manage the current rate scenario. Once there is a proper coordination with the investment horizon for the portfolio duration, there may be no need for active brainstorming at the investor level.

What is your advice to our readers in a rising interest rate environment?
Fixed income offers a plethora of strategies to suit different interest rate scenarios. The key is to identify them and marry them to suit your investment needs. Once this is done, volatility can be ignored as they act as noise for asset allocation.