In a note last month, we had talked about 4 aspects to our current assessment framework for the market (Click here). Below we briefly review these:
- The global and local macro-economic backdrop: The US data slowdown has prompted the next Fed cut, though in a more neutral way than what the market may have hoped for. That said, there is decidedly an undertone of watchfulness with respect to the evolving labor market in particular. Meanwhile China data seems to have slowed again, consistent with the hypothesis that some of the growth spurt of the first half will get given back over the second. Meanwhile, domestically while there is renewed optimism basis the GST cuts, the overhang from global uncertainties provides a large offset thereby keeping further monetary support very much in play. The possibility of spillover of goods trade uncertainties into services trade is a recent development and one that policy makers will be closely watching.
- Recent fiscal fears: These have been to a large extent mitigated; what with the quantification of GST revenue impact, the finance minister’s reiteration towards commitment to achieving current year’s fiscal deficit targets, and the recent upturn in personal tax collection. While further measures may very well have to be taken if the US measures on Indian exports were to sustain, many of the support steps are likely in the form of interest discount and credit guarantee schemes. For the time being, therefore, market is largely assured that there is no fear of additional bond supply for this financial year.
- RBI/MPC communication: Our assessment here has been that market may have overread the change of stance and that the sentiment damage associated with the communication change is largely behind us. Indeed, given possibly higher headwinds to growth from US tariffs, as well as evolving developments on possible impact to India’s services trade as well, it is likely that monetary policy will also have to continue a supportive role. This is especially so given the additional buffers provided on inflation with the GST rate cuts.
- Supply of duration: This remains an outstanding issue. More will be known in the next few days as the second half borrowing calendar gets announced. However, the going in expectation seems to be only of minor tweaks to the calendar as well as possible moral suasion for states to spread out tenor of their borrowings. Should this be the extent of the intervention, then the overhang from ‘excess’ supply is unlikely to go away in the near term. However, market will still likely find plays more suitable to its risk appetite and ones that are more closely aligned to its evolving view of the macro-economic cycle. Indeed, we see first signs of this re-emerging (too soon to be overly confident though) as appetite seems to be returning for the 5 year and around segment. This had also gone missing for a period of time until very recently.
Relative Value
With market sentiment in flux over the past few months, relative pockets of value have also been shifting on the yield curve, in our view. We had made one change in light of this to our active duration bond and gilt funds, wherein we had moved away from the long end to the 14 – 15 year segment. More recently, owing to across- the- board negative segment, one has quite counter-intuitively seen a relative flattening between the 10 year and the 5-year segments. This has thrown up some opportunities for us to add 6 – 9 year segment exposures in our active duration bond and gilt funds. As a result, the portfolios are now well diversified across the 6 – 9 year segment as well as the 12 – 15 year segment. There has been some loss of overall duration as a result, but we are comfortable with this insofar as the dominant discussion remains for the time being around absorption of bond supply thereby limiting the prospects for bond yields to fall meaningfully for now. At the same time, and as reiterated before, the global and local macro cycle is still overall bond supportive and it remains too early in our view to position for complete end of cycle plays via passive carry books alone.
Source: RBI and Bandhan Internal Research
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