The month gone by was characterised by moderate volatility due to rising oil prices and depreciating currency. The currency volatility affected bond yields as depreciating currency spooked fears of foreign investor sell-off in bonds and of an aggressive rate hike by RBI. Moreover, the news surrounding IL&FS downgrade and default put a strain on liquidity. However, RBI provided support to the market by announcing OMOs (open market operations) and easing the liquidity coverage ratio norms for banks. These measures eased liquidity situation for the fixed income markets.
How did the funds react?
The month gone by saw credit risk funds, corporate bond funds come under pressure fuelled by risk aversion. Meanwhile, overnight funds, liquid and money market funds benefitted from the tight liquidity conditions.
We talked with Dwijendra Srivastava, Chief Investment Officer (Debt), Sundaram MF, Sanjay Shah Head - Fixed Income, HSBC MF and Suyash Choudhary Head - Fixed Income, IDFC MF to understand market triggers in October and their near term market outlook.
Key triggers for the upcoming month
Dwijendra, Sanjay and Suyash believe that the RBI monetary policy will be the most important trigger in the coming month.
Dwijendra mentioned that markets are expecting a 0.25% rate hike in the coming RBI policy. Sanjay expects RBI to hike rate once by 0.25% between October to December. Suyash added that market participants would closely track the policy to understand RBI’s measures for improving liquidity conditions.
Apart from the monetary policy, crude oil prices and currency will be important triggers for the markets. Sanjay feels that markets will see whether Rupee stabilises around the 72 level.
Outlook
Suyash believes that currently markets are discounting a strong hawkish stance by RBI. He feels that yields are likely to be more stable in October compared to the last three months. “The risk perception has changed post recent credit event. It will be some time before it stabilises,” he added.
Dwijendra too feels that markets will be more settled in October compared to September. He also mentions that post the credit event some cherry picking in terms of lending to NBFC companies is to be expected. “While any shocks, both positive and negative on crude oil or Rupee front will influence markets, currently markets are taking a conservative view regarding further developments on currency and oil front,” he added.
Sanjay expects markets to remain uncertain in the near term. “While some market participants are of the view that RBI may go for an aggressive rate hike as a currency defence, we believe that it is unlikely as the approach had failed previously when RBI hiked rates by 3% in 2013 in order to halt the slide in currency. Historically, measures reducing CAD such the FCNR deposit scheme have shown to have a greater impact on stabilising the currency,” he added.
Which funds should you recommend to your clients?
Sanjay feels that in the current scenario investors should look at quality short-term funds as they are available at an attractive YTM. Furthermore, it is a good time for investors with a long-term horizon to enter the debt market as the 2-3 year bond yields are at a sweet spot currently. Investors with short-term horizon of 3-6 months should look at low duration funds.
Suyash feels that investors should look at high quality funds investing in AAA papers as well as ultra-short term and short-term funds in the current scenario.
Dwijendra believes that investors should look at money market and low duration funds in the short-term space. Investors having investment horizon of 12-18 months can consider short term funds as yields in that bucket are currently attractive.
