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What is your near-term outlook on debt markets?
RBI announced withdrawal of Rs. 2000 notes from circulation and provided a window till September 2023 for exchange/deposit of the currency notes. The withdrawal is expected to improve the system liquidity leading to a correction of ~15bps on the money market yield curve.
The markets, however, gave away most of the gains towards the end of the month as rate hike in the US looked more imminent and there was no immediate event to support a rally in bond prices.
The domestic yields continue to remain susceptible to actions of the US Fed and larger than anticipated rate hike will dampen sentiments locally. Debt markets are thus expected to remain rangebound with a bullish tone.
Expected range of 10-yr-g-sec and outlook on short end of the curve
The 10-year benchmark bond will trade in the range of 6.90% to 7.15% in the medium term. The short end of the curve is expected to correct the most when RBI starts its rate cut cycle.
Which category of funds should distributors recommend to their clients in current markets and why (e.g. short-term, medium term or duration)
An ideal investment portfolio should invest across the curve as the shorter end provides high accrual with lesser duration risk. The longer end of the curve, however, provides higher potential of capital gains but with increased duration risk.
The lopsided allocation can be made basis investor risk appetite. However, for a long-term debt investor, it would be ideal to invest in short-term and corporate bond funds as these have potential of both higher accruals and higher capital gains.
