Market update - softer yields
Several factors supported market expectations of falling yields on Indian bonds:
Favorable supply-demand dynamics also helped sustain the positive bond market momentum. The net issuance of GOI bonds was set to fall sharply to INR4bn in July from INR600bn in June in an environment of robust demand from domestic and foreign institutional investors. Indeed, FPIs poured US$2.9bn in India’s debt markets in July. The stepped-up FPI demand for corporate bonds resulted in their owning in excess of 95% of the INR2.4trn (roughly US$ 37bn) limit on all foreign investment in corporate bonds. The Securities and Exchange Board conducted a corporate bond limit auction on 26 July. The cut-off for purchasing limit was 8bps. The limit auctions will be discontinued only after the utilisation falls below 92%.
The NAV was down 20bps in INR terms. The portfolio spread increased from 61 to 70 bps in July due to the underperformance of Bajaj Finance, Shriram Transport and Steel Authority of India bonds. The 76bps rupee appreciation, however, resulted in the Fund returning 56bps in US dollar terms.
The Monetary Policy Committee, which cut the policy interest rate by 25bps to 6% on 2 August, reiterated its neutral stance on monetary policy. Its baseline inflation trajectory is now tracking a little above 4% by the end of March 2018 and 4.5% including implementation of the Seventh Pay Commission mandated salary and allowance hikes by the central government. Headline inflation could rise even further if states were to also implement similar increases in salaries and allowances. Hence, another policy rate cut appears unlikely in the coming months. As a result, the Fund plans to reduce its exposure to the low yielding government bonds while allocating more of its AUM to higher yielding corporate bonds.
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