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The month of December saw the RBI holding rates despite a fed rate cut of 25 bps. With the new Trump regime swearing in January and the fiscal budget approaching, what path will the fixed income market take?
Let’s see what fixed income experts have to say on this:
Akhil Mittal, Senior Fund Manager – Fixed Income, Tata Mutual Fund
CPI inflation is at 5.48% on expected lines with some softening in food prices. If this trend continues, the headline inflation might come well within RBI expected trajectory by Jan 2025. Market is now expecting 25bps cut in CY25 against 50 bps expectation before policy meet.
Markets will be closely watching Trump taking the reins and initial policy moves by the new regime. This could have an effect on currency markets and also future expected trajectory from the Federal Reserve.
In India, if food (especially vegetable) prices show decent moderation, this will increase confidence in RBI towards achieving inflation target and might open space for easing rates to support growth.
Other than food, CPI is below 4% for the rest of the constituents. A good Rabi harvest and softening of vegetable prices will increase the confidence in RBI. This should open up space for easing to support growth. We are bullish on rate cuts and expect a 50 bps cut over the next 6 months.
Fund recommendations
Investors should increase the duration and look to invest in longer duration category funds. Gilt funds and corporate bond funds could be a good choice for the upcoming rate cycle.
Avnish Jain, Head - Fixed Income, Canara Robeco Mutual Fund
January will be the start of a new calendar year and as the US Fed has again become data dependent, markets will be keenly watching key data points like inflation and labour markets in the US.
While Trump has already talked about his immediate action on tariffs, corporate tax cuts and immigration, the market will likely watch out for implementation and impact on global trade and local macro-economic numbers.
Domestically, India’s CPI should be trending lower on falling food prices and participants would likely watch for the inflation number ahead of February policy. Markets would likely look at corporate earnings coming out for the third quarter of FY25 to gauge any strength in the economy post the second quarter low GDP numbers.
In India, the probability of a rate cut is high on Feb 26. Overall, markets are likely to remain cautiously positive and rates may continue to drift lower as in the current financial year till date.
Government bonds will continue to benefit from passive flows on index inclusions.
Fund recommendations
Investors can choose to invest in funds like ultra-short and low duration funds to benefit from the short-term curve movement.
Pratik Shroff, Fund Manager – Fixed Income, LIC Mutual Fund
With the new RBI governor at helm, markets will be looking forward to the domestic rate cuts. The domestic liquidity has remained tight, which may prompt some durable action from the RBI including OMO (Open Market Operations) purchases along with other tools.
Government is expected to continue the fiscal consolidation at the Union budget, which is a positive for debt markets and with the Govt borrowing programme ending soon, the demand supply imbalance is likely to remain favourable.
The rates are expected to ease out as the domestic rate cut cycle beginning with 10-year sovereign yields may inch towards 6.50% in the medium term.
Fund recommendations
Gilt funds and funds with exposure to shorter end corporate bonds may provide a good opportunity to invest.
Rahul Goswami, CIO – Fixed Income, Franklin Templeton MF
RBI to remain vigilant regarding the external global environment, which may increase volatility across assets, especially emerging market currencies, including India's.
To manage this volatility, the RBI may refrain from aggressive monetary easing in the near term to avoid heightened risks to price stability. In line with the RBI's view, the recent undershooting of GDP growth was an exception.
The rate cut cycle in India will likely be shallow. Global factors such as tariff hikes on emerging markets, the fiscal situation in the US under the new administration, China's fiscal expenditure composition and lingering global geopolitical risks will play a pivotal role in determining the timing and depth of India's rate cut cycle in the forthcoming quarters.
Fund recommendations
1–5-year AAA corporate bonds and 5–10-year G-secs offer a relatively better risk-return trade-off.
