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May remained an action-packed month for the fixed income market with events like easing of inflation, dividend announcement by RBI and withdrawal of Rs.2000 denomination notes from the banking system. Also, the 10-year g-sec benchmark has crossed 7% in May.
What would happen in June and which category of debt funds should you recommend in June? Let’s look at what experts say:
Kaustubh Gupta, Co-Head Fixed Income, Aditya Birla Sun Life Mutual Fund
Wrap up of debt market in May 2023
- Debt markets have remained stable in May 2023 as inflation appears to have peaked and macroeconomic indicators still pointing to reasonable growth momentum in India
- For most part of May liquidity condition is very tight which has been addressed later due to large sovereign maturities and higher than expected dividend from RBI
- With RBI having already increased policy rates by 250 bps in FY23 and effective hike of 315 bps, the data suggest a prolonged pause from RBI
Near term outlook for debt markets
- A rate cut in the next 12 months looks unlikely
- Rates may be ‘higher for longer’ and liquidity will be used as an active monetary policy tool
- Debt market are likely to move in narrow range (largely stable) till more clarity emerges on growth front both locally and globally
- 10 year G-Sec to range between 7%-7.15% in short term. Shorter end of yield curve will continue to remain well bid due to improving liquidity conditions for next 3 months
Funds to recommend
- Investors should continue to look to invest in short term funds and money market category
Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC.
Wrap up of debt market in May 2023
- The optimism of April spilled over in May. 10Y bond rallied from 7.12% in April and is now trading below 7%
- The RBI declared a dividend of 87,416 crores against the expectation of 42,000 crores, April inflation cooled off below 5%, the withdrawal of 2,000-rupee denomination notes, large demand from private sector banks and rate pause expectation all of which contributed to an improvement in market sentiment
Near term outlook for debt markets
- Key factors that will drive the market going ahead are supply demand dynamics, liquidity in the banking system, guidance in monetary policy and geopolitical events
- There is not much alpha left in long duration bonds, so we don’t expect any significant decline in long term bonds hereon
- Short end of the curve may drift lower due to recent development on liquidity condition and due to policy rate sensitivity of this part of the curve
- 10-year g-sec is likely to trade in the range of 6.90%-7.10% going ahead, with key risk being demand supply equation
Funds to recommend
- Investors with 2-3 years holding period should consider adding their allocation to dynamic bond funds
- Investors with shorter investment horizons and low-risk appetites should stick with liquid funds
Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund
Wrap up of debt market in May 2023
- The 10yr yield breached the psychological 7% mark
- The withdrawal of Rs.2000 denomination notes led to steepening of the curve as the market started anticipating that this step can lead to deposits accrual for the banks in the vicinity of Rs. 1 to 1.50 trillion as the currency returns to the banking system in the form of deposits
- However, the actual deposit accrual might be less than what the market is anticipating though it will ease banking system liquidity and support the shorter end of the curve
Near term outlook for debt markets
- Bond yields have come down quite sharply over the last couple of months and the yields will be consolidated at the current levels
- Limited downside to yields in the near term as most of the positives like lower inflation, higher dividend from RBI have been factored in as of now
- Liquidity will ease in the banking system post the declaration of higher dividend by RBI and the withdrawal of Rs. 2000 denomination notes
- 10yr bond yield to trade in a range of 6.90% to 7.20% over the next 2-3 months
Funds to recommend
Dynamic bond funds as they are best suited to take advantage of the evolving interest rate scenario
