Debt market outlook for August 2024

The Union Budget 2024-25 lowered the fiscal deficit to 4.9% of GDP for FY2025. Also, the inclusion of Indian G-Secs in the JP Morgan Emerging Markets Bond Index supported lower yields due to higher net inflows in July 2024.

To understand impact of these changes in the debt markets and how the debt markets will do in August 2024, we spoke to industry experts - Alok Singh CIO BOI Mutual Fund, Avnish Jain, Head-Fixed Income, Canara Robeco Mutual Fund and Murthy Nagarajan, Head – Fixed Income, Tata Mutual fund who share their insights on debt market.

Alok Singh, CIO, BOI Mutual Fund

Outlook

• The debt market saw increased liquidity in the interbank market, leading to overnight rates trading at the lower end of the repo rate corridor
• This shift in liquidity impacted other segments of the money market curve resulting in a decline in money market yields across the board
• Improved demand-supply conditions contributed to a moderation in government bond yields
• The Yield to Maturity (YTM) of the 10-year GOI bond decreased from 7% at the start of the month to 6.92% by the end of the month
• Market is anticipated to remain stable with further increases in liquidity
• While money market yields may stabilize around current levels, long-term bonds could see further yield reductions due to ongoing demand-supply dynamics and expectations of rate cuts in the coming quarters
• The 10-year G Sec yield is expected to maintain a downward bias trend and may eventually drift towards the Marginal Standing Facility (MSF) rate

Funds Recommended

• Short-duration funds are recommended

Avnish Jain, Head-Fixed Income, Canara Robeco Mutual Fund

Outlook

• Market yields declined in July 2024 on positive sentiments in fixed income markets globally
• Expectations for a rate cut by the U.S. Federal Reserve in September 2024 increased following soft U.S inflation data
• Sharp rally occurred in the market due to Union Budget 2024-25 in which the government announced reduction in fiscal deficit target to 4.9% of GDP
• The inclusion of Indian G-Secs in the JP Morgan Emerging Markets Bond Index effective from the end of June supported lower yields due to passive index flows
• The yield curve steepened as short-term G-Sec yields decreased more than longer-term yields, with the 10-year G-Sec falling to 6.91% before stabilizing
• Corporate bond market yields also fell, reflecting positive sentiment from the sovereign bond market
• The outlook for debt markets remains optimistic as global rate market cues continue to reflect a dovish position
• While the RBI is expected to maintain its current policy stance, any modification in its approach or tone could result in additional yield decreases
• The 10-year G-Sec yield is expected to trade within the range of 6.85% to 7% in the short term
• Liquidity conditions remain neutra, with the RBI using variable repo rate (VRR) and variable reverse repo rate (VRRR) tools to manage liquidity on both sides

Funds recommended

• Low duration funds, medium duration funds, corporate bond funds, banking and PSU funds are recommended depending on the investor's investment horizon and risk profile

Murthy Nagarajan, Head – Fixed Income, Tata Mutual fund

Outlook

• CPI inflation in India is expected to remain between 4% and 4.5% in the coming months
• India is experiencing a normal monsoon season and sowing of rice and pulses is higher compared to last year
• RBI will monitor monsoon precipitation closely as it will impact food inflation trends and is anticipated to maintain an accommodative liquidity stance
• The potential non-inflationary growth rate of the Indian economy has risen to 8% and real interest rate currently ranges from 1.4% to 1.9%
• U.S markets are pricing in two rate cuts of 25 basis points each within this calendar year and an additional four rate cuts of 25 basis points are expected next year
• Anticipated US rate cuts are likely to ease pressure on the Indian Rupee
• Interest rate differentials are expected to widen as RBI rate cuts are projected to be between 50 to 75 basis points in this cycle
• Indian government aims to reduce the debt-to-GDP ratio from 56% to 48% in the coming years
• Capital expenditure is targeted to remain at 3.4% of GDP to boost the economy's potential growth rate
• 10-year G sec is expected to trade in the range of 6.90% to 7% in the near term
• Yields are projected to drift down towards 6.75% in the coming months as supply decreases in the latter half of the financial year

Fund recommendation

• Short term funds can be recommended for up to one year period. Investors with over one year horizon should consider corporate bond funds