10 year G-sec eased marginally in July on due to better than normal monsoons, hike in direct tax collections and reduction in oil prices after Saudi agreed to raise oil output. Yields reduced by 0.13% to 7.77% as on July 31, 2018 as against 7.90% in June 29, 2018. However, bearish sentiment prevailed in the market owing to growing tensions between US and China. The month saw both retail and wholesale inflation accelerating to 5% and 5.77%, respectively.
On the global front, US economy reporting solid growth and ECB’s decision to hold interest rates steady contributed to the yields closing higher.
Avnish Jain, Head Fixed Income, Canara Robeco MF believes that with RBI maintaining a neutral stance, the market participants expect the current rate hike cycle to be short. This led to limited market sell off with the 10-years yield remaining sticky in the 7.85% -7.95% range. “Furthermore, the rate hike can send a signal for foreign investors that the returns in India could be going up. Hence, Foreign Portfolio Investors (FPI) flows could look positive considering that they have been negative so far, this year. In short to medium term, the Indian fixed income market could remain cautious over factors such as the distribution of a normal monsoon, domestic currency movement and the trend in global crude oil prices, which could result in the market being volatile. Future RBI actions and uncertainty ahead of 2019 general actions are likely to keep markets on the edge. The key triggers to look out for this month are possibility of an interest rate hike by the Fed, movement of crude oil prices and currency movement. On domestic front, inflation, monsoon, increase in Minimum Support Price (MSPs) by government, fiscal deficit and current account deficit are likely to impact the yields in the shorter time frame,” he added.
Dwijendra Srivastava, Chief Investment Officer (Debt), Sundaram MF expects the yields to remain range bound in the near term. “In the near term, global factors may influence the markets more than domestic factors. Market participants will be following central banks in developed economies for policy rate action. Additionally, commodity prices, news regarding tariff wars, movement in oil and currency will affect yields. On domestic front, concerns highlighted by RBI in the monetary policy that is MSP, oil price can affect inflation and thereby yields. We believe that investors with an investment horizon of 9 to 12 months can consider short-term accrual products having duration in the range of 1 to 1½ years. Investors with an investment horizon of over 36 months can consider investing systematically in medium to long duration funds. However, for long-term investors having a lower risk appetite and no immediate liquidity requirement, close-ended funds are also an option,” he said.
Killol Pandya, Head - Fixed Income, Essel MF believes that the primary drivers for the coming month may be Fed policy statement, Bank of Japan policy action and rupee movements against major global currencies. Markets may continue to witness relatively tight liquidity and concerns relating to inflation and fiscal deficit may weigh on participants. Rates may remain under upward pressure though intermittent trading opportunities may not be ruled out. “In the current scenario, we continue to believe that funds with a lower duration may fare better than funds with higher duration. We retain our suggestion of remaining towards the shorter end of the duration curve and in funds which are based on an accrual strategy,” he added.
