Market update - accelerating inflation
Lower than expected GDP growth in the first quarter of the current fiscal year had revived hopes in early September of monetary policy easing as early as the meeting of the monetary policy committee on 4 October. However, several factors contributed to dashing these hopes:
While the above factors led to a significant rise in yields on GOI bonds, corporate spreads fell by 11bps last month thanks in part to continuing FPI interest in the asset class. Reflecting this strong interest, FPIs bid aggressively in the auction of corporate bond limits on 22 September. The cut-off was just over 50bps. We concur with the belief from FPIs that corporate bonds still offer investors attractive returns. Immediately following the limit auction, the government tweaked rules to raise the corporate debt limit for FPIs by INR 440bn (US$6.79bn) in a staggered fashion.
Although FPIs brought US$164mn into India’s debt markets in September, they withdrew US$1.65bn from equity markets. Disappointing growth suggested weak corporate earnings for at least one more quarter. The overall negative fund flows plus widening of the current account in the June 2017 quarter to 2.4% of GDP from 0.6% of GDP in the previous quarter resulted in a sharp -2.13% depreciation of the Indian rupee against a globally strong US dollar.
Although the Fund’s NAV fell by -2.18% in September, almost all of that loss can be attributed to the INR’s depreciation against the US$. The Fund was down only 5bps in INR terms. While the rise in yields on GOI bonds was a drag on the Fund’s performance, the 11bps decline in corporate spreads minimised the adverse impact. After all, 55% of the Fund’s AUM is invested in corporate bonds.
Towards the end of September, the Fund sold three GOI bonds in its portfolio with the intention of buying corporate bonds in early October when the corporate bonds become freely available on demand. This strategy is aimed at picking up spreads on corporate bonds of up to 70bps on AAA-rated and 140bps on AA-rated bonds.
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