Going forward, we believe there could be some reversal in inflation trajectory from the current low levels as low base effect starts playing out and best of the disinflationary forces is behind us. With the RBI maintaining its hawkish stance, there is limited scope for easing of policy rates. However, with the government working on continuously removing supply-side bottlenecks and steps like GST providing support over a longer period of time, we expect this situation of inflation remaining under control and fixed-income yields remaining positive in real terms to persist in the near future.
However, given that monetary easing is by and large behind us, we believe the preferable way to invest in fixed income segment is by following accrual strategy using short end of the yield curve. This strategy allows one to benefit from positive real yield and gradient of the upward sloping yield curve while avoiding too much volatility by eschewing high duration.
Piyush Baranwal, Fund Manager - Fixed Income, BOI AXA Investment Managers
Regarding the bond markets, a lot has changed in last couple of weeks, particularly for this year inflation’s projection.
First, the construct of GST rates turned out to be non-inflationary.
Crude prices fell and other commodity price also turned favorable for inflation.
The state budgets revealed that we are going to have a much more staggered implementation of the 7th Pay commission.
Demonetization effects on economy seem to have ended now.
We thought that vegetable prices would mean-revert after being abysmally low between November to January, but that did not happen.
Currency appreciated- contrary to market and RBI’s expectation at the start of the year, leading to a lower imported inflation.
Monsoon looks favourable as of now.
These are quite many favorable turn of events and makes us comfortable on our inflation trajectory for this year.
Consequently, the RBI may turn less concerned about inflation. On top of that, even without penciling for any OMO purchase this year, the demand supply equation of government bonds seems well balanced.
This makes us more confident to build duration at the opportune moments like we did in last two months.
Navneet Munot, CIO – SBI Funds Management
In the next RBI policy we believe the central banker may acknowledge the drop in inflation and may give guidance for lower interest rates. We assign a low probability of rate cut in the June 2017 policy.
Having said that, we believe that lower inflation and moderating growth would provide the space for the RBI to reduce policy rate by 50 bps over the course of the next one year.
In the near term, we expect the new 10-year gilt to trade in the 6.55-6.65 band, RBI policy to give direction to the market and will lead to shift in the trading band but will not alter the long-term trend of easy rates.
We expect short term rate curve up to 2 year to flatten given the renewed possibility of rate cuts going ahead. Short-term rates would move down further in case the RBI cuts rates or would remain at similar levels in the absence of rate cuts.
Kotak Mutual Fund
