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The Reserve Bank of India (RBI) increased the repo rate by 50 basis points (bps) in June 2022. Both, the policy stance and the policy rate action were as expected. However, an unchanged cash reserve ratio (CRR) came as a breather to the markets.
As rates are expected to hike further, George Heber Joseph, CEO & CIO, ITI Mutual Fund shares with us his views on debt markets and fund recommendations.
What are the expected global rate hikes?
- RBI - We expect the repo rate to peak between 5.5-6% over the next 12-15 months.
The repo rate could be between 5.5% and 5.75% if the Fed rate peaks between 2% and 3%. In case the Fed rate crosses 3%, India’s repo rate could peak at around 6%.
The level of overnight rates indicates RBI’s withdrawal of its accommodation stance. Overnight rates are trading near the lower standing deposit facility (SDF) rate and are expected to transition higher towards the policy repo rate over the coming few quarters.
- US Fed - Minutes of the May 2022 US FOMC (Federal Open Market Committee) meeting indicate a broad consensus of 50 bps (1% = 100 bps) hikes at the next couple of meetings.
Furthermore, Fed officials also noted that a restrictive policy may become appropriate. Markets have priced in a 2%-3% neutral rate range for the Fed rate but a Fed policy rate beyond 3% remains a risk at this point.
- European Central Bank (ECB) - At the ECB, there seems to be a considerable consensus for a July 2022 initial rate increase, with officials increasingly seeing ECB rates to be out of the negative zone this year.
Does this change the outlook and return expectation?
We do not foresee the need to materially change our outlook and return expectations. We continue to see value in bonds of two to four-year maturity and expect sovereign bonds to outperform high grade credit.
Which debt funds make sense in the current scenario?
ITI Dynamic Bond Fund and ITI Banking & PSU Debt Fund are suitable for investors wanting to park funds from a medium to long-term perspective. These categories can generate good inflation-beating risk-adjusted returns and are ideally positioned to take advantage of the volatility in debt markets.
Additionally, investors can also take advantage of evolving market conditions through duration funds.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
