QUICK LINKS
Summary
Market update - Bond yields seesaw
Yields receded from their elevated levels following RBI’s MPC meeting in early April when the central bank issued the most dovish policy stance under its current governor. In particular, it lowered guidance with respect to inflation. The inflation forecast for the first half of fiscal year 2019 was trimmed by 50 bps to 4.7-5.1%. The RBI’s tone in the press conference was also very positive. It termed the inflationary impacts of the Seventh Pay Commission mandated salary hikes and vegetable price acceleration as transitory and seasonal. Within two weeks, however, RBI released minutes of the MPC meeting. Their unexpectedly hawkish tone with two members on the panel speaking of ‘withdrawal of accommodation’ had an immediate adverse impact on yields.
A few other factors also contributed to rising yields in April:
All in all, yield on the benchmark 10-year GOI bond surged once again to 7.77% at end April from the low level of 7.13% immediately following the dovish MPC meeting early in the month.
The 37bps rise in yield on the benchmark 10-year GOI bond in April coupled with only a modest 6bps decline in AAA-rated 10 year corporate bond spread led to a 0.35% reduction in the Fund’s NAV in Indian rupee terms. Furthermore, the rupee’s 2.27% depreciation against the US dollar meant that the Fund returned -2.61% in USD terms. The Fund’s year-to-date total returns are -3.70% (USD) and 0.69% (INR).
Strategy
The Fund is currently structured to benefit from interest rate reductions in the offing for several reasons. First, inflation is set to come down over time, especially if the monsoon season is normal. Second, the government should start spending in the near future, thereby improving liquidity and hence bond prices. Third, the decision by the RBI to lift the restriction in place since 2014 that prevented FPIs from investing in GOI and corporate bonds with less than three years in residual maturity. At the same time, the FPI limit auctions for GOI and corporate bonds have been eliminated in favour of on-line monitoring of limits. Both are positive for FPI purchases of bonds.
The content or fund you have selected is not available for the profile or region you have selected. Please select one of the options below to return to the site.