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The debt market remained range bound in November.
However, with inflation inching higher due to significant rise in food prices and low GDP growth numbers, it is difficult to say what RBI will do in the December policy review - whether it will continue to focus on curbing inflation or support growth through bold policy measures.
Let us look at what experts feel as they share their debt outlook with us.
Siddharth Chaudhary, Senior Fund Manager – Fixed Income, Bajaj Finserv MF
The Consumer Price Index (CPI) inflation surged to a 14-month high of 6.2%, with food inflation dramatically rising to 9.7% year-over-year. This was a 70-basis-point increase from the previous month. Core inflation also ticked upward to 3.7%, reaching its highest point since December of the previous year.
Foreign exchange reserves experienced their most significant weekly decline ever, dropping by US$18 billion and totaling a cumulative decline of almost US$50 billion. This decline can be due to two factors: substantial FPI selling in both equity and debt markets and strategic central bank interventions.
The US elections triggered what was termed the "Trump trade". The 10-year Treasury yield soared from around 3.6% in mid-September to peak at 4.45% before moderating by 20 basis points as election-related fears subsided.
This upward shift in Sovereign yield curve in India is also a market response to some incremental change in the macro background. First, the expectation of higher inflation number as faster disinflation in vegetable prices in still some time away. Secondly, we have seen some improvement in high frequency growth numbers in last two months. And finally, volatility in currency market has returned. INR/USD pair has depreciated to an all-time low in response to continuous FPI outflows and US election outcome.
In coming quarters as slack in growth becomes more visible, we expect policy priority to shift from restraining inflation to supporting growth. So, for the RBI there is an increased trade-off between growth and inflation. Growth is already moderating while inflation is yet to moderate in the coming months. We don’t expect rate cuts in December policy.
Recommended Funds
- Investors who can hold for 1 year can consider investing in longer duration funds
- Investors with lesser duration appetite can consider Banking PSU/Corporate funds having average moderate duration of 3-5 years
Avnish Jain, Head - Fixed Income, Canara Robeco MF
The November debt market narrative was fundamentally shaped by the US elections, which introduced significant macroeconomic uncertainties. The election results amplified market fears about potential higher fiscal deficits in the United States and potential increases in tariffs, which could potentially trigger higher inflation.
The CPI inflation reading of 6.2% in October 2024 was particularly impactful, driven by a sharp rise in food inflation. This economic data points effectively pushed market expectations for the Reserve Bank of India's (RBI) rate cut from the December policy to the February policy of the Monetary Policy Committee (MPC).
Looking forward to December, the US Federal Reserve's policy announcement on December 19 is expected to include a potential 25-basis-point rate cut, with markets keenly awaiting guidance on future rate cut trajectories. Additionally, both US and Indian CPI inflation data are anticipated to be significant sentiment shapers. The India GDP data is considered crucial for the RBI's December policy considerations, particularly in evaluating the potential trade-off between inflation and growth.
Recommended Funds
- Optimistic on the short end of the curve
- Low duration and ultra short term fund
- Long duration funds like gilt fund
Rahul Goswami, CIO - Fixed Income, Franklin Templeton MF
Commodity and energy prices likely to impact India's inflation & growth trajectory with soft crude oil prices befitting fiscal spend.
Fiscal stimulus by China could increase commodity prices, which may not go well for India. Higher commodities prices would lead to higher input costs and turn inflationary.
Change in stance to “neutral” by RBI in the last monetary policy can be viewed as a step closer to lowering of policy rates.
Current domestic growth, inflation dynamics and the optimism in the bond market have led to flattening of the yield curve at the longer end. We are moderately on the duration front, and expect optimism in the bond market may only materialize in the next 2-4 quarters.
The change in regime in the US could be disruptive and inflationary. Expect RBI to take a gradual approach to monetary easing while balancing growth and inflation mandates.
