Posted On Friday, Aug 09, 2024
The bond market maintained its positive momentum in July supported by increased foreign buying, a fiscally prudent budget and softer global backdrop. The 10-year Indian government bond (IGB) yield fell 8 basis points during July from 7.0% to 6.92%. It declined further to 6.87% (as of August 8, 2024) during early August following a sharp drop in the US treasury yields.
Short term money market rates too declined sharply during the month due to easing liquidity condition and a sizeable reduction in the treasury bills issuances by the government. The 3-months Treasury bill yield fell from ~6.80% at the June end to around 6.62% by the July end. Notwithstanding the drop in treasury bill yields, short term CD/CP rates remain almost unchanged around 7.15% (for AAA PSUs).
In the Federal Open Market Committee (FOMC) meeting held on July 30-31, 2024, the US Federal Reserve (Fed) left the interest rates unchanged at 5.25%-5.50%. However, it hinted at potential rate cuts in September acknowledging easing inflation pressures and rising unemployment.
Rate cut bets increased further after the July labor market data which showed a surge in the US unemployment rate to 4.3%. New job creation and wage growth rate also declined in July.
On this backdrop, the US treasury yields declined sharply with 10-year UST falling from 4.39% at the June end to a 12-month low of 3.77% on August 5, 2024 before rebounding to 3.91% as of August 8,2024. According to the CME FedWatch Tool, which monitors the implied forecasts of fixed income markets, the market is expecting the first interest rate cut in September 2024 (50 basis points with a 63.5% probability) and additional 50 bps cuts by the end of 2024.
Among other major economies, Bank of England (BOE) cut the policy rates by 25 bps while the Bank of Japan (BOJ) hiked policy rates from 0-0.1% to 0.25%. BoJ’s rate hike took the markets by surprise and resulted in a sharp strengthening of JPY triggering a panic selloff in risk assets across the globe in following days.
Despite significant global events, including the US recession concerns and financial market turbulence post BOJ rate hike, the RBI maintained its focus on domestic growth-inflation dynamics.
Going into the policy, there were some thoughts of RBI announcing OMO sale to suck out excess liquidity in the banking system which is currently hovering near Rs. 3 lakh crores. However, RBI seems comfortable with the prevailing surplus liquidity condition and guided to continue with VRRR operations to manage the liquidity on margins.
This move would allow the high surplus liquidity conditions to persist for a longer period keeping short term money market rates close to or below the policy repo rate.
CPI Inflation reached a four-month high in June, rising to 5.1% YoY from 4.8% in May. This increase was primarily driven by higher food prices, particularly vegetables. Excluding vegetables, headline CPI stood at 3.5% YoY; while the Core CPI which excludes Food and Fuel prices, was around 3.1% in June.
In July Headline CPI inflation might fall to 3.5%-3.8% due to favourable base effect. However, it is expected to bounce back to above 4% during the second half of FY25. On the other hand, we expect core CPI to jump closer to 3.9% in July and stay around that level due to reversal in base effect and increase in telecom tariffs. That being said, we remain comfortable with the overall inflation trend. A favourable monsoon and healthy sowing trend should aid decline in food inflation going forward.
India’s FY25 Union Budget focuses on fiscal discipline and deficit management. The government utilized the additional revenue from the RBI dividend to reduce the fiscal deficit at an accelerated pace and enhance spending in almost same proportion.
The targeted fiscal deficit for FY25 is 4.9% (compared to 5.1% in the interim budget), with a minor reduction in market borrowing. The government was reasonably conservative in its revenue assumptions and there is a possibility of the government overachieving its fiscal target.
With key events behind us, the market will switch back to demand supply dynamics in the bond market and emerging inflation trend.
We maintain our positive stance on long-term bonds in view of the structural shift in the demand supply balance and the cyclical turn in inflation and monetary policy globally.
Growing demand for long-term bonds by domestic insurers and pension funds, along with foreign investors’ index-driven inflows, will bolster the bond market. Furthermore, easing monetary policies in advanced economies should aid a downward move in domestic bond yields as well.
In this declining interest rate environment, investors with medium to long investment horizon, should consider dynamic bond funds. These funds can allocate to long-duration bonds while keeping flexibility to adjust portfolio position if market conditions become unfavorable. This adaptability allows investors to remain invested for a longer period.
Investors with a short-term investment horizon and with little desire to take risks, can invest in liquid funds which invest in government securities and do not invest in private sector companies which carry lower liquidity and higher risk of capital loss in case of default.
Source: RBI, MOSPI, Bloomberg
Disclaimer, Statutory Details & Risk Factors:The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Mutual fund investments are subject to market risks, read all scheme related documents carefully. |
Posted On Friday, Aug 09, 2024
The bond market maintained its positive momentum in July supported by increased foreign buying, a fiscally prudent budget and softer global backdrop.
Read MorePosted On Thursday, Jul 04, 2024
In June, a significant event transpired when Indian government bonds were added to the JP Morgan Emerging Markets Index.
Read MorePosted On Wednesday, Jun 05, 2024
After a brutal April, May 2024 brought cheer to the Indian bond markets.
Read MoreGet In Touch
Take small steps in your financial planning to achieve big dreams! Start your investment journey today!