Fixed Income Investment Strategies and Market Outlook

The Monetary Policy Committee of the RBI decided to keep the policy repo rate unchanged at 6.5%, a third pause decision in a row. The decision was unanimous. Consequently, the standing deposit facility (SDF) rate stands unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate unchanged at 6.75%. The MPC also kept (with a vote of 5:1) the stance unchanged at “withdrawal of accommodation” to ensure that inflation progressively aligns with the target, while supporting growth.  

The G-sec yield curve continues to remain flat as heavy demand by sectors like insurance for the longer segment of the yield curve is keeping yields under check. Also, liquidity in the banking system seems to be adequate, taking off the pressure from the shorter end of the curve.

We believe, the cumulative impact of the 250-bps hike in policy rates over the last 12 months is yet to be fully reflected in the economy, which typically happens with a lag. With today’s announcement of no change in policy rate and stance by RBI, markets are now expecting a pause till Q1 FY24-25. The 10-year G-sec, in the short term, is expected to continue to trade in a range of 7.1% to 7.25% in the absence of any adverse event.

• With the recent spike in yields and with interest rates at the peak of the current cycle, yields offer a decent accrual and a possibility of participation in capital appreciation. Long-term yield may see some widening in the near future, and hence, medium & medium to long-term debt allocation can be considered, to benefit relatively more with moderation in yields.
• Credit spreads have just about started to appear attractive after adjusting for risk, although still low relative to history. The current credit spreads for sub-AAA rated securities are below long-term average and may not offer attractive reward for risk.

One should continue to consider debt as a part of the overall asset allocation mix as it helps to fundamentally diversify the portfolio. This can also be achieved by considering select hybrid mutual funds (equity savings, multi-asset and balanced advantage funds).

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