8 Aug 2023
While global equity markets did well, fixed-income market trends observed stress. However, this was not the case in India, where equities and debt markets are doing fine. As markets test extremes, Abhishek Bisen, Head-Fixed Income, Debt-Fund Manager and Dealer at Kotak Mahindra Asset Management Company Limited, shares key highlights of what looks like to be in store for fixed-income investors.
Major global highlights:
- In the United States, inflation was the key cause of concern. In June 2023, the headline Consumer Price Index (CPI) came at 3% while the core inflation was at 4.8%, suggesting the pressures are abating.
- The Gross Domestic Product (GDP) data for the United States for the April-June 2023 quarter came in at 2.4 % against the expectation of 1.8%, indicating a strong economy.
- The Federal Open Market Committee (FOMC) in July 2023 delivered the much-anticipated rate hike of 25 bps, and it took rates from 5.25% to 5.5% and kept space open for future actions depending on the data.
- Other central banks, such as European Central Bank, hiked rates by 25 bps, while Japan kept the policy unchanged, it signalled the flexibility on yield curve control resulting in some spike in yields in Japan.
- In a nutshell, we are close to the peak of rates. However, the bar for the September 2023 hike is high by the FOMC, and the market also does not seem to be discounting the same as of now.
Major trends in the domestic economy:
- Banking system liquidity seems comfortable, and RBI is actively managing it and not letting it loose with active variable rate reverse repo (VRRR) auctions.
- So far, India seems to be doing well. However, the upcoming inflation data may cause some disturbances.
- There may be a spike in CPI in coming days; given the volatility in vegetable prices, particularly tomatoes, the number could be around the 6% mark.
- Globally commodities, especially crude, have also been rising, which might disturb the apple cart if they sustain longer.
- Depending upon the current scenario, at the Reserve Bank of India (RBI), the monetary policy announcement on August 10, 2023, may not result in any rate action. However, the commentary on inflation needs to be watched if the central bank is willing to look through it or not.
- The RBI may look through the noise and can keep an eye on the bigger picture.
What can be the investment strategy to be considered?
- The yield curve is flat with 1 year – 10 years within the band of 6.90-7.20%.
- The yield might trade in a narrow range in the near term, and then a parallel downward shift can take place as the expectation of Federal Bank “pivot” and RBI “change in stance” increases over the next few months.
- We are near the peak of rates; one may look to increase the duration of the investment portfolio in line with the intended investment horizon. One can also look at hybrid funds as per risk appetite.
Source: Kotak Mahindra Asset Management Company Limited (“KMAMC”) Internal Research. Data as on July 31, 2023.
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