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5 Jun 2023
May was a rewarding month for fixed-income investors. But how will June pan out for the markets? Abhishek Bisen Head of Fixed Income at Kotak Mahindra Asset Management Co. Ltd. shares his outlook for the month.
The Global Outlook:
- In May, the United States Federal Open Market Committee (FOMC) decided to hike the target rate by 25 bps to 5-5.25% with a mild tint of dovishness. While inflation is moderating, the US GDP growth seems stronger, making it incrementally tough for policymakers to act. However, it seems that the pause in the key interest rates by the Federal Bank may be very close.
- Since the much-debated deal on the debt ceiling in the US is heard to be achieved; hence the risk associated with a debt default by the US is out for now.
- Inflation in the UK is still very high; hence the policymakers may need to catch up a lot before calling it a day on rate hikes.
Key highlights on the domestic front:
- India’s inflation trajectory is running much below the projections by the RBI; hence the projections of 5.30 RBI for FY24 are likely to undershoot for the year, and the same will act as a cushion for the adverse impact of monsoon, if any.
- GDP for the financial year 2022-23 is expected to surprise on the positive side.
- RBI delivered an Rs 87,000 crore dividend to the government, which was much higher than what was budgeted. It also decided to withdraw 2000 rupee notes from circulation, which is about Rs 3.6 lakh crore outstanding. Both measures will have a positive impact on liquidity; hence no other action, such as an open market operation (OMO) or cut in Credit Reserve Ration (CRR) cut, may be needed to manage liquidity in the near term.
- The RBI monetary policy meeting is scheduled for the second week of June, and our base case is RBI shall keep rates on hold at 6.50% for now.
Key outlook for debt markets by Kotak Mutual Fund:
- While the market in the US is discounting rate cuts in September / December, Indian bond markets are reasonably placed with no such expectation. However, swap markets are discounting some cuts next year onwards.
- We had advised the investors to increase the duration of the portfolio, and the same has worked well, and we continue to recommend the same.
- We are near the peak of rates and expect the yield curve to steepen with very short rates moving down with liquidity.
- With the withdrawal of indexation benefits, investors and distributors somehow feel that there is no alternative for efficient fixed-income investment options. We would like to recommend investors also look at hybrid options like arbitrage funds and equity savings schemes.
- Investors can consider debt hybrid in the low/ zero tax bracket, and investors with a high-risk appetite and seeking long terms investments may look at equity hybrid and balance advantage funds.
The document includes statements/opinions which contain words or phrases such as "will", "believe", "expect" and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general economic and political conditions in India and other countries globally, which may have an impact on investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.
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