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As expected, the policy stance and rates remained unchanged in the October 2023 monetary policy review. However, the debt market was taken aback by the governor’s statement that Open Market Operations (OMO) auctions could be used as a liquidity management tool. While this led to an adverse reaction in October 2023 and what would be the key drivers from here on?
Here is what industry experts believe.
Amit Somani, Senior Fund Manager, Tata MF
Outlook - The near-term outlook is largely driven by anticipated OMO announcement and movements in US Treasuries. OMO along with RBI’s emphasis on an inflation target of 4% will keep the liquidity tight and anchor inflationary expectations. Talking about the curves, 10-yr g-sec may range between 7.25-7.50% and the short-end may remain at attractive levels offering decent accrual.
Recommendation - Money market and ultra short term category funds for a 1 to 3-month horizon and short-term/corporate bond funds for a 6 to 12-month or longer investment period. Also, gilt funds for investors comfortable with higher volatility and having a 6 to 12-month horizon.
Gautam Kaul, Senior Fund Manager-Fixed Income, Bandhan MF
Outlook - While the domestic bond market has remained resilient, it may face a near-term challenge due to the prospects of OMO sales and the upward move in UST yields (Treasury yields). However, we are optimistic about the medium-term demand-supply dynamics and believe that volatility in the last leg of a rate cycle should be seen as an opportunity to increase duration.
Recommendation - A core and satellite asset allocation framework may work well. The core bucket usually focuses on the 3 to 6 year maturity bucket like the short-term/medium-term categories. On the other hand, the satellite allocation typically includes funds with a mandate to take unrestrained duration risk.
Kaustubh Gupta, Co-Head Fixed Income, Aditya Birla Sun Life MF 
Outlook - Most central banks are near the end of the rate hiking cycle and inflation is trending down. However, we do not expect rate cut in the near term. Also, the key risk to monitor would be crude oil prices, especially in the wake of recent events in the Middle East. While the sensitivity of the economy and inflation in energy prices have come down, it nevertheless is a risk which needs careful monitoring.
Recommendation - Ultra-short/low duration/floating rate funds for a 3-to-12-month period, corporate/short-term/banking & PSU debt funds for over 12 months and dynamic bond/target maturity funds for over 3 years. Lastly, US FOFs for a 12-month-plus period for those seeking internal exposure.
Manish Banthia, CIO - Fixed Income, ICICI Prudential MF
Outlook - Catalysts like government spending, fiscal and monetary support, improved balance sheets for corporates and banks etc. have helped India to move into the mid-stage of the business cycle. In this phase, economic growth may continue to remain strong without inflation sustainably breaching RBI’s tolerance band. Effectively, it is a neutral zone for RBI but any shift in growth trajectory could change the status quo.
Recommendation - We remain positive on accrual assets due to stable macros and elevated interest rates. Also, floating rate bonds, may continue to see improved demand for their attractive spreads. Investors can look at shorter duration and dynamic duration schemes to manage interest-rate fluctuations.
