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The month of October marked a significant shift in monetary policy as the RBI surprised markets by changing its stance to "neutral" while maintaining the repo rate at 6.50%. This follows the US Fed's substantial 50 bps rate cut in September and growing expectations of further rate cuts through 2024. The markets are being closely watched due to the uncertainty surrounding the US elections taking place on the 5th of November.
Here's what industry leaders had to say about the market developments and outlook.
Avnish Jain, Head - Fixed Income, Canara Robeco AMC
RBI surprised markets by changing stance to “neutral”, which was largely unexpected. The month also saw the introduction of a new 10Y benchmark, with markets initially rallying post-RBI policy announcement before retracing as US yields climbed on positive labor data. FII debt saw outflows this month after substantial inflows of nearly USD 17 billion in CY2024. The 10Y yield (old benchmark) maintained a narrow trading range of 6.75%-6.85%.
The next move is likely to be a rate cut of 25bps, though it remains to be seen whether it would be in the upcoming December 2024 Monetary Policy Committee (MPC) meeting or RBI would remain cautious and wait for more data till Feb 2025 MPC.
Looking ahead to November, markets will closely watch the US Presidential elections on November 5th, along with upcoming US labor and CPI inflation data. The domestic October CPI data will be crucial in determining whether higher inflation might push RBI rate cuts into 2025.
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The short end of the curve (1-2 years) presents opportunities as this segment shows highest yields compared to longer tenures. Investors may consider:
- Ultra short-term funds
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Rahul Goswami, CIO - Fixed Income, Franklin Templeton AMC
The global monetary landscape has shifted with major central banks initiating rate cuts. Domestically, positive developments in monsoon patterns (7% above long-term average) and improved reservoir levels suggest stable food prices ahead. The certificate of deposit (CD) and commercial paper (CP) exhibit steepness and are most remunerative in the three to six months period.
The RBI's balanced approach in October policy reflects careful consideration of both growth prospects and inflationary pressures. Market indicators suggest gradual monetary easing ahead.
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The 3-6 year duration segment with higher coupons offers good risk-reward trade-off without undue duration risk.
Piyush Baranwal, Sr. Fund Manager, WhiteOak Capital AMC
While the RBI maintained a cautious stance on rate cuts, calling them "premature and risky" at this stage, October's policy shift represents the first tacit acknowledgment of an impending rate cut cycle. It gives RBI maneuverability under uncertainty arising out of US elections, geopolitics and commodity prices.
October also saw the inclusion of Indian government bonds in the FTSE Emerging Markets Government Bond Index, effective September 2025. This marks the third major index inclusion in the past year. While the expected flow from this latest inclusion is likely to be small, these steady index inclusions serve to bring increased attention of global investors to Indian bond market. This is especially important given that foreign investor holding of Indian bonds is miniscule compared to other emerging markets much smaller in size. This increased foreign holding helps to diversify demand and lower borrowing costs over time.
On the domestic economy front, several fast-moving growth indicators have been soft recently indicating moderation in economic activity. This was also borne out by some consumer companies calling out weakness in urban demand. When coupled with CPI projection at 4.2% for Q4'FY25, the RBI might initiate a shallow rate cut cycle starting February.
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For investors looking at longer horizons:
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- Multi-asset allocation funds
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