‘Duration funds remain well-positioned to take advantage of evolving market conditions’

George Heber Joseph, CEO & CIO, ITI shares with us his recommendations along with a holistic view of the debt market.

• The US Fed expectedly increased policy rates by 0.25% in March 2022 and indicated that it saw ongoing rate increases to be appropriate. Furthermore, the Fed Governor stated that an announcement related to the shrinking of the Fed's balance sheet could come as early as May 2022.
• The latest Fed median forecast shows policy rates at 1.9% at the end of 2022 and 2.8% by end of 2023. However, the expected resilience of the US economy amidst supply shocks emitting from the geopolitical upheaval led sanctions on Russia has prompted the markets to not only price in higher end 2022 interest rates but also front-ended rate increases of larger magnitude.
• The European Central Bank (ECB) left its main rates unchanged in March 2022 but announced a faster winding down of its asset purchase program. Comments from the ECB Board members indicate a significant likelihood to the ECB hiking interest rates in late 2022/early 2023.
• The ruling BJP party's strong showing in state elections results in March 2022 augurs well for India as this allows policy continuity; which is especially important in current times when the country is facing a commodity supply shock led adverse macro environment.
• Our view remains that the Reserve Bank of India (RBI) will increase the repo rate in either August or October 2022 but heightened geopolitical and macro challenges may force the central bank to act a meeting sooner. We continue to expect the repo rate to peak around 5.0% - 5.5% and currently see a base case of it topping around the lower bound of 5.0% by late 2023/early 2024 at the earliest.
• We do not foresee the need to materially change our outlook and return expectations. Our duration funds remain well-positioned to take advantage of evolving market conditions and remain confident in our aim to deliver inflation-adjusted real returns on these products.
• We continue to like front-end (2-3 year) high-grade bonds from an accrual perspective as markets have largely priced the future repo rate path. Off-benchmark government bonds in the 4–8-year maturity bucket seem attractive from a medium-term perspective.