Stock market strategy: Should you increase your fixed income allocation as bond yields spike after RBI policy? | Stock Market News
Source: Live Mint
The Reserve Bank of India’s (RBI) on December 6 kept the benchmark repo rate unchanged at 6.5% for the eleventh straight meeting, and maintained the monetary policy stance ‘Neutral’. The six-member Monetary Policy Committee (MPC) led by RBI Governor Shaktikanta Das decided to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.
The rate setting panel also cut the Cash Reserve Ratio (CRR) by 50 basis points (bps) to 4%. The CRR cut is set to release ₹1.16 lakh crore into the banking system in two tranches, announced Governor Das. He expects tight liquidity conditions in the next few months, along with advance tax-related outflows and quarter end requirements,
The MPC revised both its inflation and growth forecast for FY25, pegging down the GDP forecast at 6.60% from 7.20% earlier and increasing the CPI inflation forecast to 4.80% for FY25 from 4.50% earlier.
Following the release of Q2FY25 GDP data, the bond market began anticipating potential monetary easing in the RBI policy. Market consensus leaned towards a reduction in the CRR, considering the expected liquidity constraints in the banking system. These constraints were attributed to the RBI’s substantial interventions in the foreign exchange market over recent months, along with anticipated outflows driven by increased currency circulation, advance tax payments, and GST outflows.
Bond Market Reaction
The Indian government bond yields jumped, with the 10-year benchmark bond yield posting its biggest one-day rise in the last six months after the RBI maintained its policy rates, while infusing liquidity, which was largely factored into bond prices.
The benchmark 10-year yield ended at 6.7446% as against its previous close of 6.6802%, posting its biggest rise since June 4.
“Though going into the policy, consensus was for a CRR cut and RBI delivered as expected, heavy positioning going into the policy and RBI Deputy Governor Michael Patra’s comment in the post policy press conference that the ‘underlying slowdown in growth is coming from inflation’ was read as being hawkish by a segment of the market which led to bond yields rising by 5-7 bps across the curve,” said Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund.
What should debt market investors do?
Pal believes that bond yields will continue to be supported by more liquidity infusion measures like open market operations (OMO) purchases by the RBI and continuous growth slowdown along with inflation cooling off. He suggests investors can use any uptick in yields to increase their Fixed income allocation.
“Investors with a medium to long-term investment horizon can look at funds having duration of 6-7 years with predominant sovereign holdings as they offer a better risk-reward currently. Investors having an investment horizon of 6-12 months can consider Money Market Funds as yields are attractive in the 1 year segment of the curve,” Pal said.
He expects the benchmark 10 year bond yield to gradually drift lower towards 6.50% by Q4 FY2025.
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