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The month of September brought a US Fed rate cut of 50 bps alongside an anticipation of further rate cut by the end of the year. Domestically, the Indian bond yields dropped due to a decline in crude oil prices and global bond yields.
As the industry awaits the Monetary Policy Committee (MPC) meeting in October, there is much anticipation on revision of domestic interest rates.
In this context, Cafemutual asked the leaders of debt industry to share their outlook on the market. Here’s what they had to say:
Siddharth Chaudhary, Senior Fund Manager – Fixed Income, Bajaj Finserv MF
Foreign Portfolio Investors (FPI) inflows in FAR (Fully accessible route) securities have remained robust. In India, headline inflation for Aug 24 was at 3.65% vs 3.50% July-24 when it dropped largely owing to a high base. As the base effect wanes off, we can see the core trending back to 4% plus as we move to FY25. We don’t expect any rate cuts but any change in stance and/or slight dovish commentary can’t be ruled out.
At end of this month, government borrowing calendar for second half of the year would be announced. It’s possible that borrowing number can be a bit lower than expected. This can result in some rally in bonds, which have already performed well.
The reasons supporting easing monetary policy in India are stacking up such as record low core inflation, expected fall in food prices post monsoon and high real rates possibly restricting growth.
Recommended funds
We recommend investors with a holding period of at least 1 year to consider investing in longer duration funds. The 10- to 15-year segment and longer end of yield curve stands to gain from any possible rate cuts in future.
Investors with less appetite for duration risk can consider funds like Banking PSU/corporate funds with moderate duration of 3-5 years.
Avnish Jain, Head - Fixed Income, Canara Robeco MF
The major event of September was the US FOMC (Federal Open Market Committee), which delivered a jumbo 50bps rate cut to start the easing cycle in the US.
India’s CPI remained below 4%, printing 3.65% for August 24. FII debt flows remained positive in September, though it slowed down a bit, probably with investors awaiting US FOMC decision.
Medium term outlook of debt markets remains positive. US FED has started the rate easing cycle and the RBI is likely to join sooner or later. Most of the large systematically important central banks have cut rates in 2024 (except for Japan which has increased rates).
In the medium-term, global rates are likely to go lower and overall yields curves should shift down. Indian rates are also likely to soften, though rate cuts from RBI are likely to be fewer.
Recommended funds
The short end rates remain elevated in comparison to the medium to long end of the curve and presents opportunity to investors as Indian market awaits its first sign of easing.
Corporate bond curve is inverted right now with 1-year rates higher than any other part of the yield curve. In a rate cut cycle, short term rates fall faster than longer term rates. Investors may choose to invest in these categories of fund.
Pratik Shroff, Fund Manager – Fixed Income, LIC MF
Domestically, the cancellation of Treasury Bill auctions for the last fortnight owing to high cash balances provided some respite to the shorter end curve, which continues to remain elevated.
At the upcoming Monetary Policy Committee (MPC) meeting in October, we assign a 50% probability of a stance change as new independent members join the committee. A change in stance may propel the markets pricing in a rate cut for December. Some measures on liquidity can be expected if MPC continues with the current stance as RBI ensures overnight rates remain anchored to repo rates.
Foreign Portfolio Investors continue to pour money in Indian sovereign securities post its inclusion in the JP Morgan Index and as the weightage rises, the demand of Indian sovereign will go up among investors globally.
Apart from this, the domestic demand from long term investors has also remained strong with PSU bonds being the biggest beneficiary.
In the interim, bonds yields may remain volatile in a narrow band as global data continue to provide mixed signals. Spreads on high quality AAA assets is expected to narrow down as markets chase higher yields with investors chasing the limited supply in longer end corporate bonds.
With higher cash balances and robust tax collections, we may see a borrowing cut towards the financial year end.
Recommended funds
In the current scenario, investors with a shorter horizon can look at ultra short duration fund and low duration fund categories as the spreads over repo rate continue to remain attractive.
For longer horizon, the categories like banking and PSU Fund, medium to long duration fund and G-sec ETF (having longer duration) can provide significant diversification benefit.
Pankaj Pathak, Senior Fund Manager - Fixed Income, Quantum MF
Indian bond yields continued to drift lower in September following gradual decline in global yields and crude oil prices. The 10-year Indian benchmark yield fell around 13 basis points while the 5 year yield declined by around 8 basis points.
In near term, the debt market will take cues from the government’s second half borrowing calendar and the RBI’s monetary policy. The RBI might soften its tone on inflation taking comfort from healthy monsoon season and strong sowing trend and fall in commodity prices. Broadening global monetary policy cycle should also help on margins.
Medium term debt market outlook is supported by ‘structural shift’ in demand supply balance and ‘cyclical turn’ in inflation and monetary policy.
Given the rapid formalisation and financialisaton of the economy, assets of long-term domestic investors like insurance companies, pensions, provident funds etc. are expected to grow at a solid pace, adding to demand for long term bonds. Foreign demand for Indian bonds is also growing rapidly amidst India’s inclusion in the global bond indices.
The new LCR (Liquidity Coverage Ratio) for banks could also boost banks’ demand for high quality bonds. On the supply side, the government is aiming to reduce fiscal deficit and debt. Thus, we expect demand for bonds to outpace its supply over the next few years.
With inflation on a downward trend, the RBI is expected to start a rate cutting cycle by Dec 2024 or Feb 2025.
Overall, we see bond yields heading down towards 6.0-6.5% over the 9-12 months.
Recommended funds
Dynamic bond funds are very well positioned to gain from the potential fall in interest rates. But this will require a longer holding period of at least 2-3 years. Investors with shorter time horizon should stick to liquid funds or other money market categories.
