Cooling of retail inflation, open market operations by RBI boded well for debt markets during the month. However, farm package, lower GST collection and subdued divestment receipts raised concerns about fiscal slippages. Fluctuation in crude oil prices and rupee also influenced market sentiments in January. Debt markets also faced credit shocks as repayment ability of the Essel group came under question and Jharkhand Road Projects Implementation Co. Ltd and West Gujarat Expressway Ltd stopped their debt repayments and demanded refunds of debt payments after October 15. On the bright side, overall exposure of mutual funds in these companies is not very high.
How did funds react?
Short-term and money market funds fared better than long duration and gilt fund during the month. Credit funds also recorded marginally positive returns.
We talked with Kumaresh Ramakrishanan, Head – Fixed Income, DHFL Pramerica MF, Sujoy Das, Head-Fixed Income, Invesco MF and Suyash Choudhary Head - Fixed Income, IDFC MF to understand market triggers in February and their near term market outlook.
Key triggers for the upcoming month
Budget will be a key trigger for the market in February. The fiscal deficit numbers for FY 18-19 and government’s fiscal target for FY 19-20 will influence market sentiments in the short term, said Kumaresh. The fiscal policy will give sense of the fiscal stance of the government if it comes back to power, according to Sujoy. Suyash expects a 0.1% - 0.2% slippage in fiscal target for this year and next year.
The monetary policy on February 7 is another important trigger for the market as it is the first policy announcement under the new governor, said Sujoy. As there has been a significant reduction in inflation numbers, a change instance is likely with a possibility of rate reduction, feels Sujoy. Kumaresh and Suyash too expect RBI to change its monetary policy stance from tightening to neutral. However, they do not expect a rate cut announcement in the upcoming policy meeting. Markets will take guidance from the announcements made in the policy, shared Kumaresh.
With the global backdrop being fairly benign, Suyash does not see any imminent risk to the markets in during the month.
Sujoy expects markets to be largely positive in February with RBI being supportive and continuing its open market operations (OMOs) to infuse liquidity.
Assuming the budget and monetary policy expectations are met, markets could be fairly stable during the month, according to Suyash. Globally too, weakening growth and dovish central bankers augur well for bond markets, he added.
Markets have been range bound in the last few weeks, said Kumaresh; a clear direction is likely to emerge post budget, he feels.
Which funds should you recommend to your clients?
Suyash feels that in current markets, investor can consider short to medium term products and corporate bond funds. According to him, on the credit front, investors should not look at credit risk in terms of credit event rather they should evaluate whether they are over allocated to credit and analyse if their current exposure to credit is justified.
According to Kumaresh, investors can look at low volatility products such as ultra short term funds, short term funds. On credit side, investors can consider investing in products investing in medium to high end of the credit spectrum.
Investors can look at investing in short term funds in the current markets, feels Sujoy.