Are you confused on which Fixed Income instrument to choose under current market scenario? Read this space to know that investment that will help you to earn attractive yet stable returns.
The advance estimate for GDP growth at around 5% yoy has come out even more depressing than was earlier anticipated. Growth in manufacturing in Dec-12 has already contracted to -0.6% yoy.
It was the extended period of high repo rate and the high borrowings by the public sector that pushed up the borrowing cost in the economy. This reduced the incentive to incur capital expenditure and raised the incentive for savings. As a consequence, the overall demand in the economy declined, and the economy began to moderate rapidly.
However, the change in the RBI policy stance, as signaled by the 0.25% cut in repo rate in January-13, is important. It may be a precursor to provide larger policy impetus to growth. This rate cut was in tandem with the Union government’s string of reform measures to reduce the fiscal burden and improve the investment climate.
If the union government follows through with this trend and reduces the fiscal deficit in the FY14 budget, we can expect the interest rates in the economy to decline even faster. This may help boost the GDP growth and increase the tax revenues, thus further assisting in managing the fiscal deficit.
Moreover, the expanding economy and the reduced fiscal deficit would also improve the foreign investor sentiments and helps augment the Forex inflows. In such a situation, the Rupee not only obtains the needed support against the dollar, but such inflows would also help in addressing the issue of current account deficit and imported inflation. This would also provide further room for rate reduction to the RBI in the months ahead.
In the longer run, the rising reliance of the US on the shale oil, may bring down the international prices of oil. This may also help reduce the Indian current account deficit and help provide relief to RBI on issue of structural inflation.
As a result, there is a steady increase in optimism in the debt market about the future outlook. The 10 yr yields have already declined by 31 bps in the last three months and is currently hovering at around 7.80-7.85%. With the likelihood of further rate cuts post the Union Budget, we can expect a calibrated reduction in the repo rates.
In such circumstances, we believe that duration funds with risk-prudent MTM component may provide investment opportunities. Such investors, who are looking to capitalize from the rate-cut decline and having a 1 year investment horizon, can look at investing in them.
However, as a caveat, fiscal populism based on political exigencies and/or bad monsoon; could prove to be a real damper of sentiments for the duration funds.
Other than that, the tight liquidity in the money market is presently providing high carry in the money market. Especially in the 4-6 month segment of the yield curve. We believe that these rates would moderate as government spending and RBI OMO operations take off by around April-13. From that point of view, investors can look at investing in Ultra Short Term Debt Funds with an investment horizon of 3-6 months.
The views expressed in this article are personal and should not be construed as an advise. Readers are requested to consult their advisors / financial consultants before taking any investment decidion.
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