19 May 2022
The start of the financial year 2022-23 does not seem to be the best for the debt market.
An off-cycle hike in repo rate by the Reserve Bank of India and the introduction of the standing deposit facility have led to an uptick in bond yields and certain nervousness in the investor community.
Earlier this month, the RBI raised the repo rate by 40 basis points to 4.4% and raised the cash reserve ratio by 50 bps to 4.5%.
The Indian central bank is starting its cycle of normalising interest rates, and this seems to be very aggressively discounted by the market, as indicated by the OIS levels, says Lakshmi Iyer, the Chief Investment Officer (Fixed Income) and Head - Products at Kotak Mahindra Asset Management Co. Ltd.
“The series of rate hikes which has just started off in March could continue to at least reach a pre-pandemic level repo rate to start with,” Ms Iyer said while discussing the monthly outlook for May.
With the repo rate at 4.4% and the in-year yield at about 7.45%, the spread is currently more than 300 basis points, which was only about 120-130 basis points before the COVID-19 pandemic.
There is currently “excessive paranoia” in the market, and this means that the yield for the 10-year G-Sec could remain in the range of 7.50-8.00% even if the terminal repo rate goes up to 5%, Ms Iyer said.
Investors could consider enhancing duration on the fixed income side and products such as the Dynamic Bond Funds, Gilt Funds, Bond Funds and Medium Term Funds.
Investors must keep investment horizons in mind because volatility is likely to be the “order of the day”.
Source: RBI, Bloomberg