Why are bond markets witnessing a selloff? Akhil Mittal of Tata MF explains

In the case of the Federal Reserve, which mostly drives the central banker behaviour or the money flow behaviour globally, they have been on a path of facing inflation or trying to crush inflation head-on. In that scenario, they have increased rates or tightened monetary policy conditions more than expected. If you expect a certain amount of tightening to happen and the Federal Reserve goes and loosens more than that or does rate hikes more than that and the commentary thereafter remains hawkish, there is no solace for the bond markets. You will see interest rates going up, you will see a selloff in bond markets and that is what is happening.

Also, we have to see the magnitude of losses. We are coming out of an extraordinarily low-interest rate regime worldwide, from that perspective when you are coming out from a two-decade kind of low-interest rate regime, entering into normalisation, you will see a significant rise or significant structural shift in interest rates and that leads to the bloodbath in bond markets. This is what we are seeing worldwide, it is not exclusive to any particular economy; most of the economies which are facing inflation are seeing their bond yields going up primarily because the central banks do tend to move in tandem.

The rupee has hit a fresh low, it has breached the 81 to dollar mark and the RBI has been trying to stabilise it. How much further down do you see the INR go against the stronger dollar and do you see in the light of this fixed income products drawing greater traction going ahead? Also, where do you peg RBI rates at?
We are likely to see a 50 bps kind of rate hike in September as against the general expectation a month ago of around 6% terminal rate. Repo rate expectation has gone up to 6.5& purely because you would not want interest rate differential to come down, that puts your currency at risk especially because you are a deficit country.

We will not see the repeat of the taper era of 2013, we will see RBI moving in the same direction as global central banks using a few interest rates as a shield but not completely. We have an ample or decent amount of umbrella in form of forex reserves. RBI will first use that more effectively rather than go for all-out on interest rate because that will make the local interest rate market take a strong beating.

Now when it comes to debt funds, yes it is simple arithmetic. The existing bond investors or the debt market investors will see some mark-to-market interim losses but I think with increased accruals, and increased earnings, the bond market or investors in bond markets over a longer period, medium to longer period are in for a good return. Just that the initial period, the next three-to-six months is going to be a trough zone. The volatility therein, both in terms of time and in terms of the absolute amount of spikes, would be much lesser in India as compared to the rest of the world.