From the desk of R. Sivakumar, Head, Fixed Income Axis Mutual fund
The new RBI governor, kicked the year off on a dovish note changing the monetary policy committee (MPC) stance from ‘calibrated tightening’ to ‘neutral’ and cutting policy rates by 25 bps. Markets took this in their stride, given the concerns on the fiscal deficit. It has also continued liquidity enhancement measures through open market operations in an attempt to provide sufficient liquidity in the system to stimulate growth on the back of the impending elections.
Over the course of FY 2019, the RBI has pumped in significant durable liquidity into the system. This has propped up asset prices. Given high real interest rates, the RBI MPC may remain comfortable with real rates at 150-200bps in an attempt to attract foreign fund flows. With seasonally tight liquidity conditions normalizing post April, we believe there is scope for bonds across the curve to rally in the next few months.
Most participants expect a further easing of rates by March 31st 2019 citing low inflation and waning Q3 GDP numbers. The continued tight liquidity despite RBIs open market operations (OMOs) and tepid corporate borrowing has kept yields elevated relative to G-Secs and hence we prefer the corporate bond space.
We have selectively added duration in our portfolios through long bonds. Elevated spreads have made the risk-reward more attractive in AA credits and hence we have selectively added such credits across our portfolios as well. As always our prudent investment norms and strong risk mitigation framework have helped us sidestep material credit risk. The corporate bond spread in the short to medium tenor space also offers material opportunities for buy and hold investors and hence believe that investors should consider deploying funds in roll down strategies.
