Market update - Hardening yields
Several factors contributed to a modest increase in yield on the benchmark 10-year GOI bond in August:
Against this background of potentially rising inflation came the release of decelerating GDP growth at month-end. In the April-June quarter of the current fiscal year, GDP growth slowed much more than consensus market expectations to 5.7% YOY. The consensus estimate of growth was as high as 6.5%. Indeed, growth was lower than 6.1% in the final quarter of the last fiscal year ended March 2017. While investment picked up ever so slightly to 1.6% from -2.1% in the previous quarter, private consumption slowed further to 6.7% from 7.3%. The lingering effects of demonetisation and the implementation of the GST may have had adverse impact on consumption. Unless this growth recovers, however, there is unlikely to be a meaningful increase in investment. As a result, growth is likely to stay subdued for at least one more quarter.
While the slowdown in growth will increase pressure on the RBI to cut policy rates in the coming months, the expected rise in both CPI & WPI may limit the scope for such action. As such, the market will likely wait for more information on details on growth and inflation trajectory before building up heavy positions.
The Fund benefitted from the 19bps compression in corporate spreads and 0.3% appreciation of the Indian rupee against the US dollar during August.
Prior to the negative news on GDP growth, the Fund had raised the share of corporate bonds in its total holdings to 45% from 40% in the month before while keeping the portfolio’s duration flat at 4.2 years. This shift towards corporate bonds has served us well. No significant changes in the portfolio’s composition are contemplated given the current uncertainty on RBI’s rate policy.
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