Indian bond prices continued to decline in June as yields rose, owing to increased government borrowing program and expectations that the Reserve Bank of India (RBI) may not cut rates further, post the release of strong economic data.
The Indian government has scheduled to borrow around Rs 4.5 trillion during the financial year 2009-10 to finance the widening fiscal deficit.
The expectations of higher government borrowings resulted into the yield on the 10-year benchmark government bond, 6.05%, 2019, rising to 7.01% in June, from 6.7% in the previous month. The RBI raised Rs 600 billion during June.
The softening in the headline inflation, which declined to -1.3% for the week ended June 20, from 0.6% on May 23, helped bond prices.
During the month, mutual funds net invested Rs 107.4 billion in debt securities, approximately same as compared to the previous month. In comparison, foreign funds invested Rs 10.7 billion in debt securities last month.
India Liquid
The Morningstar India Liquid category includes funds with residual maturity up to 91 days. These funds invest primarily in money market and debt instruments. During the one-year period ended June 2009, this category generated 1.3% risk-adjusted return.
Escorts Liquid was the best performing fund in this category. The fund delivered 3.6% risk-adjusted return. On an absolute basis, the fund was up 9.8%, during the one-year period.
India Ultra Short Bond
The ultra short bond portfolios invest in investment grade debt securities that have residual maturities of less than one year but greater than 91 days. During the one-year period, this category posted 1.3% risk-adjusted return with Fortis Short Term Income generating the highest return of 3.6%. On an absolute basis, the fund registered 10.0% return. It was rated four stars by Morningstar.
India Short-Term Bond
The short-term bond category funds invest in corporate and government securities with residual maturities between one- to three-years. These funds are fairly conservative and carry lesser interest rate risks, compared with longer duration bond funds.
During the one-year period, the short-term bond category posted 3.1% return. Within this category, JM Short Term posted the highest risk-adjusted return of 9.5%. On an absolute basis, the fund was up 16.3% and was rated five stars.
India Intermediate Bond
The intermediate bond funds invest in corporate and other investment grade debt securities and have average effective maturities between three- to seven years. Due to their higher durations, these funds are relatively more sensitive to interest rate risks, as compared to short term bond funds.
This category registered 3.7% risk-adjusted return for the one-year period ended June. Within this category, Canara Robeco Income posted the highest risk-adjusted return of 22.7%. On an absolute basis, the fund was up 30.8% return and was rated five stars by Morningstar.
India Short Government
The funds investing in short maturity government bonds delivered -0.7% risk-adjusted return, during the one-year period in June. Tata Gilt Securities Short Maturity was the best performer in this category with 5.1% return. On an absolute basis, the fund registered 12.0% return. It was rated five stars during the three-year period ended June.
India Intermediate Government
The intermediate government bond category generated 4.7% return, during the one-year period. The best performer in this category was JM Government Securities Regular, which registered 19.5% risk-adjusted return. On an absolute basis, the fund posted 29.9% return and was rated four stars by Morningstar.
India Long Government
The long government funds have average maturity more than seven years. ICICI Prudential Gilt Investment delivered the highest one-year return in this category. The fund posted 19.0% risk-adjusted return, as compared to category average of 4.7%. On an absolute basis, the fund delivered 31.5% return and was rated five stars by Morningstar.