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The month of August was volatile for the debt markets globally. It began with the Bank of Japan increasing interest rates, followed by the news of weaker labor market data in the US. This resulted in sharp volatility in the risk assets across the globe and a significant drop in yields for all major economies.
On the domestic front, RBI kept the repo rate unchanged at 6.5%. Though there were some concerns on elevated food inflation, the domestic liquidity conditions remained in surplus and supported the softening in money market rates.
Will this trend continue in the coming month? Let’s find out from Jalpan Shah, Head Fixed Income, Trust MF, Prashant Pimple, CIO, Fixed Income, Baroda BNP Paribas MF and Puneet Pal, Head-Fixed Income, PGIM India MF who share their outlook on the debt markets.
Jalpan Shah, Head Fixed Income, Trust MF
Outlook
- The global backdrop is turning favourable for the rates markets with markets pricing in 100 bps of rate cuts by the Federal Reserve in this calendar year and additional 125-150 bps of rate cuts in 2025
- Tighter lending norms are expected as stress has been building in the unsecured lending segment
- Inflation is likely to moderate on the back of a good monsoon helping cool-off the perishable components of the food basket while the core inflation will broadly remain in control
- 10-year g-sec is expected to trade in the range of 6.70- 6.90% in the near term with a potential downside in yields towards 6.50% in the medium term
Funds recommended
- Conservative investors can look to invest in fund categories like short duration, medium duration, banking and PSU debt funds and corporate bond funds. Also, AAA rated g-sec funds look promising at this time
Prashant Pimple, CIO, Fixed Income, Baroda BNP Paribas MF
- India bond yields may soften further due to global flows into debt markets with ongoing JP Morgan index inclusion related flows, expectations of US monetary policy pivot and current worries on global growth
- Inflation is expected to soften going forward. On core front, indirect spillover of lower commodity prices on input cost inflation and reduced momentum of our core inflation could be there
- Domestic monetary policy pivot could materialize in Q4 FY25, whereas US monetary policy pivot will be supportive of stance change in the Oct-24 or Dec-24 policy
- 10-year g-sec can be capped around 7.00% levels with downwards bias due to factors like FPI demand, expectations of softer inflation going ahead, rate cut bias by developed markets central banks
Funds Recommended
- Investors investing for the short term can consider liquid, ultra short and money market funds given the view at shorter end of the curve. Investors with medium to long term investment horizon can consider the short term and dynamic category
Puneet Pal, Head-Fixed Income, PGIM India MF
Outlook
- We remain positive on fixed income markets. Domestically, a robust growth rate is expected but there can be certain moderation in the last quarter of FY25 and early FY26 due to tighter lending norms by banks and NBFCs
- We see a downtick in the yields to continue especially at the long end of the curve
- Potential rate cuts are expected in FY2025 before this time no changes in the rate cycle are expected till then
- We expect 10 yr- g-sec to hover around 6.70- 6.90% in the coming month continue and short-term yield is expected to remain stable
Fund recommended
- Long duration funds look attractive at the current juncture
