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The month of May saw India and Pakistan engage in a geopolitical conflict after retaliatory strikes by India on Pakistan’s terrorist camps. Globally, the trade war between the USA and China eased a little after both countries agreed for a 90-day pause on the implementation of tariff. USA also struck a deal with the UK to bring some stability in the global markets.
Domestically, RBI infuses liquidity in the markets through Open Market Operations (OMOs) of Rs. 1.25 lakh crore. There were also other positive indicators like decline in headline inflation and the announcement of Rs. 2.68 lakh crore dividend by RBI. So, what does June hold for the debt markets?
Cafemutual spoke to Avnish Jain, Head – Fixed Income, Canara Robeco MF, Killol Pandya, Head – Fixed Income, JM Financial MF, Marzban Irani, CIO – Fixed Income, LIC MF, Piyush Baranwal, Senior Fund Manager, WhiteOak Capital MF and Siddharth Chaudhary, Head – Fixed Income, Bajaj Finserv MF who shared their views on the fixed income market.
Events to look forward to in June
The fund managers are looking forward to Monetary Policy Committee (MPC) meeting to be held in June which could bring more relaxation in the interest rates. While Piyush thinks that the MPC meeting could lead to a 25-bps cut in interest rates, Avnish believes that the RBI governor’s commitment to ensuring positive durable liquidity of 1% of net demand creates room for the RBI to reduce the rates.
Siddharth feels that the announcement of the Q4 FY25 GDP data will be a key data point and a lower-than-expected number will increase the possibility of a rate cut, possibly by 25 bps.
Marzban and Killol are looking forward to an early arrival of monsoon, which could help the market participants estimate the food inflation numbers in the upcoming months. In addition, Avnish and Killol are also keeping an eye on the tariff situation and the geopolitical conflicts, which can continue to impact the fixed income market in June.
Medium-term outlook
Avnish expects the monsoons to be good, which may keep the food inflation in check and the overall inflation within 4% of RBI target. He also sees the possibility of further rate cuts in the latter part of year depending on trajectory of inflation and growth.
Echoing a similar view, Killol expects relatively comfortable market liquidity, normal monsoon, manageable sovereign borrowings and a benign monetary policy while maintaining a constructive medium-term outlook.
Marzban thinks that the medium-term yields are headed lower and will remain constant until further trigger. He points to any further trigger in the index and global ratings upgrade as possible new triggers.
Piyush believes that the US FED will probably restart its rate cut cycle in the coming quarters given the expectations of weakening US growth, driven by tariff related impact on both investment and consumption. This could lead to Indian bond yields to continue moving lower over the course of the year. He identifies steady fiscal consolidation by the government and the possibility of sovereign rating upgrade as other factors which could support the lower domestic bond yields over the medium term.
Siddharth thinks that reduced forecasts of inflation, decline in the U.S. dollar index and anticipated rate cuts by the US Federal Reserve create further room for monetary easing in India in the medium term. He thinks there is a strong possibility of a 50-bps rate cut if global trade conditions deteriorate further. He adds that a more accommodative monetary policy stance is warranted from RBI to support economic momentum.
Fund recommendations
Avnish Jain: Corporate bond funds and banking & PSU funds are likely to perform in a scenario of lower short-term rates. For short term investment horizon, one can invest in low duration funds. With expected rates cut over medium term, long duration funds like gilt funds could be considered for longer investment horizon.
Killol Pandya: Investors who prefer lower volatility may look at money market funds or low duration funds. Investors who have a higher risk appetite may consider dynamic bond funds.
Marzban Irani: Low duration funds may provide good opportunity for investments.
Piyush Baranwal: The middle portion of the yield curve provides the best risk-reward trade-off currently, through government securities as well as corporate bonds. Investors can also gain exposure to this through corporate bond funds, medium duration funds and hybrid funds which are positioned in the above-mentioned segment of the curve
Siddharth Chaudhary: Investors with a holding period of at least 1 year can invest in longer duration funds. If deeper rate cuts materialize, the 10- to 15-year segment and the long end of the yield curve are good choices. For investors with lesser appetite for duration risk, banking and PSU/corporate bond funds with moderate duration of 3-5 years are preferable.
