Mr. Dhawal Dalal
President & Chief Investment Officer - Fixed Income, Edelweiss Mutual Fund.
Mr. Dhawal Dalal has 20 years of experience and an MBA from University of Dallas (USA). Mr. Dhawal has joined Edelweiss Asset Management Limited in the year 2016. He is responsible for the overall growth of fixed income assets through a healthy mix of retail and institutional clients. Before joining Edelweiss Asset Management Limited, he was the head of Fixed Income at DSP Black Rock Investment Managers Private Limited and led a team of Fund Managers managing fixed income assets. His role there was to expedite overall growth of fixed income assets, performance and client interactions.
When not occupied with work, he loves reading on emerging trends in the global markets, geo-political developments and books on behavioral trends. He’s also a movie buff and never misses a chance to watch a blockbuster with his near and dear ones. A humble and learned person, he strongly believes that every individual should have a sense of purpose in life!
Please note we have published the answers as it is received from the Fund Manager of Edelweiss Mutual Fund.
Q1. With a change in leadership at the US Federal Reserve expected around, how should global and Indian debt market investors think about continuity versus change in policy approach and market expectations?
Ans: Global financial markets are keenly awaiting the potential change in the thought process from the new Fed chair on their stance on inflation and the trade-off between AI-led productivity gains (which can lower inflation) and recent tariffs-led price gains (which may not have been fully passed through). The current Fed is perceived to be extra cautious on tariff-led uncertainties. If the new Fed chair can drive consensus on inflation trajectory to be lower, then Fed will be able to cut rates more aggressively. This will be bullish for global financial markets including Indian bond markets, in our view.
Q2. With the rupee experiencing phases of depreciation, how should debt mutual fund investors understand its impact on interest rates, inflation expectations, and fixed-income portfolio positioning?
Ans: INR’s recent depreciation is mainly due to FPI outflows and not due to any macroeconomic event. That said, the INR’s depreciation will have mild effect on our import basket amid the recent fall in crude oil while it will have a positive impact on our exports. As a result, the FY26 CAD is expected to be ~1% of the GDP, which will be within the tolerance zone even as the BoP will be in slight deficit for the second consecutive year. Overall, the recent move in the INR appears to be growth-supportive in our view and will not have any material negative impact on India’s growth-inflation dynamic, in our view.
Bond investors should, therefore, take advantage of the recent increase in bond yields in 2- to 3-year segment and lock in attractive rates with the investment horizon of at least one year as we expect the RBI to keep policy rates at current levels in CY2026.
Q3. With India’s inflation remaining well below the RBI’s medium-term target for an extended period, how should investors interpret this phase?
Ans: The recent decline in headline inflation in India has two main drivers – cyclical and structural. Cyclical drivers include above average monsoon for three years, lower crude oil prices and benign weather conditions. Together, they have contributed to lower food and energy prices which form the bulk of our inflation basket. Structural drivers include declining trend in nominal GDP growth, improvement in logistics, storage & transportation and maturing consumption patterns.
Taking all these together, we believe that India’s headline inflation is likely to experience lesser volatility as compared to the past and will likely remain in a range of 2% to 5% going forward.
Lower average inflation is relatively good for the investor in general as aggregate savings rate may improve.
Q4. Given that the FY27 fiscal deficit target is marginally lower, but gross market borrowings remain high, how do you see the net impact on long-term bond yields?
Ans: While FY27 gross borrowing is higher, the net borrowing is comparable to FY26 net borrowing. We believe that the bond market will have to reconcile this difference going forward as IGB maturities will rise every year going forward.
That said, we expect GOI’s debt to GDP ratio to gradually trend lower towards 50% by FY31 as highlighted in the new framework in the Union Budget. A lower government borrowing is always good news for the bond market. A declining trend in the government borrowing, overall improvement in fiscal health and strong & sustained economic growth in the next five years should lead to a gradual decline in bond yields barring any unexpected event risk, in our view.
Q5. Following the recent Union Budget’s increase in STT on F&O transactions, there has been discussion around its potential impact on arbitrage fund strategies. How do you assess this change, and what should investors understand about its implications for arbitrage funds?
Ans: Assuming there is no revision in the Budget proposal of revision in STT on F&O transactions, we expect a mild impact of ~30 bp on the annualized returns of arbitrage funds.
We believe that risk-reward ratio is still in favor of the investors of arbitrage funds on tax-adjusted basis as compared to other investment opportunities in the current market conditions.
Q6. What is your in-house credit research process? How do you assess a company's ability to pay, beyond just relying on external credit ratings?
Ans: Our credit assessment framework is based on multiple drivers such as analysis of key macro-economic factors, analysis of the sector followed by the analysis of the borrower.
Analysis of the macro-economic factors include analysis of the current fiscal landscape, monetary policy landscape, overall credit environment, current regulatory landscape, analysis of the banking system and overall term structure of rates
Our sector analysis includes the fiscal health of the sector, recent profitability trends, analysis of the dominant player & his pricing power, regulatory landscape pertaining to the sector, capacity utilization etc.
Analysis of the borrower includes deep dive into financial health, profitability trends, free cash flow, borrowing trends, quality of the leadership, their reputation and their business acumen, shareholding structure, trend in the market cap etc.
A thorough analysis of these factors provides us with a good understanding of the credit and the drivers of their underlying credit rating. We also continuously monitor the diversification of bond holders, recent trends in credit spreads, secondary market liquidity in bonds of the underlying credit and any material development either at the sector level or at the borrower level.
Source: Internal Research
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