In June, Monetary Policy Committee (MPC) meeting's outcome was along the expected lines. RBI kept repo rate unchanged at 4% and maintained the accommodative stance to revive growth. The central bank also announced other liquidity measures to keep the yields contained.
However, continuously improving global growth trends, rising global commodity prices and higher domestic inflation numbers led to market expectation of early normalization of monetary policy. This led to bond yields moving higher despite a host of measures introduced by RBI. RBI was able to contain only 10-year government bond yield at around 6% (it traded in the narrow range of 5.99 to 6.06 during the month). Most of the other maturities across the yield curve saw yields rising by 15-25bps.
What to expect
Dhawal Dalal, CIO-Fixed Income, Edelweiss AMC
- Bond market participants will tread cautiously amid signs of economic revival, elevated inflationary concerns, potential higher supply of bonds and subdued sentiment
- Participants will keenly await RBI's assessment of the evolving macro-economic situation and their suitable response in these challenging times
- RBI may introduce the new 10 year India Government Bond (IGB) in July 2021. Short-end of the curve (1-3Y) should remain under pressure amid subdued investor sentiment and crowded investor positioning
Marzban Irani, CIO – fixed income, LIC Mutual Fund
- Debt markets will remain range bound till RBI keep on supporting yields
- However, with the increase in vaccination, higher inflation and higher commodity prices, debt market yields will remain under pressure and gradually inch upwards
- At present with RBI support, 10- year g sec yield is expected to be in the range of 5.90 to 6.10
- The existing 10 -year G- sec yields might inch upwards towards 6.25 on announcement of a new 10-year
Sandeep Agarwal, Senior Fund Manager Fixed Income, Sundaram MF
- The near-term outlook will largely depend on containment of covid-19 and progress of vaccination
- Currently, short end of the rate curve is largely dictated by policy rates and liquidity conditions
- Medium to longer tenure of the rates will be determined by economic recovery and inflation expectations
- RBI may start normalization process in the second half of this financial year
- We expect 10 year g-sec rates to be in the range of 5.95% to 6.15% in the near term
- The short end of the curve (up to 1 year) is likely to remain range-bound
- 2-5 year segment of the curve may observe some northward movement over expectation on normalization of monetary policy in the second half of this financial year
What to recommend
Marzban Irani
Low duration funds and short-term funds having lower average maturity
Sandeep Agarwal
- For investors with one to three year investment horizon - short-term debt, corporate bond and banking & PSU funds
- For investors with up to one year investment horizon - ultra-short or low duration funds
