The Indian fixed-income market registered negative returns in July as higher government borrowings and burgeoning fiscal deficit weighed on investor sentiments. The yield on the 10-year government bond, 6.9%, 2019, rose to 7.0% in July, from 6.8% previous month.
The Indian government has scheduled to borrow 4.51 trillion rupees for financial year 2009-10 to bridge its alarming fiscal deficit, which is expected to widen to 6.8% of gross domestic product, its highest in 16 years.
The Reserve Bank of India in its first quarter review of monetary policy for FY 2009-10 indicated a change in stance on interest rates from dovish to neutral on possible inflation concerns. The central bank further stated that it would continue to adopt accommodative monetary stance until there are definite and robust signs of recovery.
The RBI revised its GDP growth forecast as well as inflation forecast upwards to 6% and 5% respectively, from previous estimates. During the month, the headline inflation, as measured by the Wholesale Price Index, fell to -1.54% for the week ended July 18, from -1.17% previous week.
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 July 2009, this category generated 7.3% negative risk-adjusted return. Escorts Liquid was the best performing fund in this category. The fund delivered 4.8% negative risk-adjusted return. On an absolute basis, the fund was up 9.3%, during the one-year period.
The ultra short bond funds 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 6.9% negative risk-adjusted return with Fortis Short Term Income generating the highest return of -4.7%. On an absolute basis, the fund registered 9.6% 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 -4.5% return. Within this category, JM Short Term posted the highest risk-adjusted return of 3.4%. On an absolute basis, the fund was up 18.7% 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 4.2% negative risk-adjusted return for the one-year period ended July. Within this category, Canara Robeco Income posted the highest risk-adjusted return of 11%. On an absolute basis, the fund was up 27.9% return and was rated five stars by Morningstar.
India Short Government
The funds investing in short maturity government bonds delivered -8.6% risk-adjusted return, during the one-year period in July. Tata Gilt Short Maturity was the best performer in this category with -3.8% return. On an absolute basis, the fund registered 11.3% return. It was rated five stars during the three-year period ended July.
India Intermediate Government
The intermediate government bond category generated -1.9% return during the one-year period. The best performer in this category was JM Government Securities Regular, which registered 9.8% risk-adjusted return. On an absolute basis, the fund posted 29.3% return and was rated five stars by Morningstar.
India Long Government
The long government funds invest in government securities with average maturity more than seven years. ICICI Prudential Gilt Investment delivered the highest one-year return in this category. The fund posted 9.5% risk-adjusted return, as compared to category average of -5.3%. On an absolute basis, the fund delivered 31.1% return and was rated five stars by Morningstar.