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While January saw the swearing-in of the US President Donald Trump, the fixed income market saw several measures by the RBI to infuse liquidity in the economy.
February has already seen the union budget and now awaits the Monetary Policy Committee (MPC) meeting.
So, how do the veterans of the fixed income market see the budget and the upcoming MPC meet? This is what they had to say when Cafemutual asked them to share their debt outlook for the month of February:
Mahendra Jajoo, CIO- Fixed Income, Mirae Asset MF
The budget and the MPC meeting are the key events the debt market is looking forward to in February.
The recent budget is expected to provide a major boost to consumption with the massive reliefs on income tax front for the lower and middle class. Along with sustained capex, economy is expected to regain the lost momentum in quick time.
Overall, the interest rate cut cycle has started in the US while the fiscal consolidation targets have been met in the budget. The inflation levels are also low and globally, the geopolitical situation is improving. RBI is also likely to take note of these and a more accommodative monetary policy is expected in the near term.
Fund recommendation
Low duration for investors with low risk appetite and long duration funds for investors with high risk appetite will be appropriate.
Deepak Agarwal, CIO- Fixed Income & Head – Products, Kotak MF
In February, the Open Market Operations (OMOs) done by RBI will impact the debt market. The core liquidity in the banking system will be close to Rs. 1 lakh crore following the measures taken by the RBI. However, the repo rate auction can only bring temporary relief unless the central bank believes there will be a revival of the FII flows in the second quarter. It looks like RBI will have to take more measures to infuse liquidity.
In the medium term, I believe there will be a shallow rate cut cycle. The US Fed can cut 25-50 basis point over the course of the year. The GDP growth in FY26 can be close to 6-6.5%. The average food inflation in FY26 is expected to be around 3-3.5% due to good rabi output. RBI can also cumulatively cut about 50-75 basis points including a cut in February. The yields will remain range-bound through the year.
Recommended funds
Corporate bond fund or a medium-duration fund with 3-3.5 year duration would be good for investors. Dynamic funds with modifiable duration, income plus arbitrage funds can also be good from a taxation point of view.
Murthy Nagarajan, Head – Fixed Income, Tata MF
The 10-year US yield which was around 4.65% went back to the level of 4.5%.
Domestically, RBI has started acting decisively on the liquidity front and is now planning to do open market purchases of Rs. 60,000 crore in three tranches of Rs. 20,000 crore each. RBI is doing USD-INR buy sell swap of $5 billion to infuse liquidity. Additionally, the central bank is also doing a 56-day variable rate repo auction on February 7. As it is happening after the monetary policy decision, it is expected that RBI will cut rates.
The budget has been good and the fiscal deficit has been brought down to 4.4%. RBI is likely to follow this by a rate cut or by giving indications of a rate cut. So, the rates will stay in the 6.65-6.75% range and will move towards 6% afterwards. In the medium term, I see a movement of about 45 basis points.
Fund recommendation
Duration funds will give better results to the investors. Once the rate cut cycle starts, liquid funds and funds up to 1 year duration will start re-pricing at a lower rate. Going forward, returns in these funds will be lower in April-May than current levels. Corporate bond funds, banking & PSU funds, short-term bond funds, gilt funds will also do well.
Rahul Singh, Senior Fund Manager – Fixed Income, LIC MF
February is always a critical month considering two important events, Union Budget and Monetary Policy Committee (MPC) meeting.
Due to external sector uncertainties and incoming data from the US being strong, MPC’s role will be severely restricted. However, debt market will wait with respect to the policy decisions that RBI undertakes to solve the liquidity issues.
In the medium term, yields are likely to come down as liquidity situation improves. Systematic liquidity deficit for a prolonged period may eventually hurt growth, hence sooner or later there should be concrete measures by RBI/MPC to address the issue.
With inflation on the downtrend and liquidity getting better, rates may ease in next 3-6 months assuming no surprises on the global political and macroeconomic front.
Fund recommendation
There could be a good opportunity to invest over 1-year horizon in schemes from ultra short duration fund category.
Piyush Baranwal, Senior Fund Manager - Fixed income, WhiteOak Capital MF
Within India, domestic liquidity remained tight on account of continued FPI outflows and aggressive foreign exchange intervention by RBI in the earlier months. Given that Jan-Mar quarter is typically a busy season for liquidity, market participants were looking expectantly at RBI for respite.
February begins with the annual budget and we expect the government to continue on the path of fiscal consolidation and peg its fiscal deficit to around 4.5%, leading to a net borrowing number of about Rs. 11 - 11.5 trillion, slightly lower than last year, which should be well received by the market. Given the slowdown in the domestic economy and RBI’s CPI projection of 4.5% for Q4 FY25, we expect a 25-bps rate cut in February RBI policy meeting.
Going forward, given RBI’s CPI projection for Q2 FY26 at 4%, we expect one more rate cut in the quarters ahead, taking total rate cut during CY25 to 50 bps.
Fund recommendation
Corporate bond funds and dynamic bond funds can be a good choice for investors. Also, investors with high risk appetite may consider taking debt exposure through hybrid funds like multi asset allocation funds and balanced hybrid funds.