Indian government bond yields have softened and the yield on the benchmark 10-year note is trading around 6.99%, below the psychological 7% mark. Local fundamentals remain strong, while hopes of interest rate cut in the US also led to bond yields drifting lower.
Domestic bond yields cooled off in the month of May after the Reserve Bank of India (RBI) declared a dividend of ₹2.1 lakh crore, almost double the amount which bond markets expected.
While the higher dividend provides larger flexibility to the central government on the fiscal side, the positive surprise enthused the markets, with the benchmark 10 year bond yield ending the month at 6.98%.
Meanwhile, India’s headline retail inflation fell to a 12-month low of 4.75% in May.
Domestic GDP growth for FY24 rose to 8.2% YoY from 7.0% in FY23, while GVA growth rose to 7.2% versus 6.7% in FY2023. Trade deficit widened to a seven-month high of $23.78 billion in May, government data showed.
FPI flows in Indian Bonds picked up post global index inclusion and strong macro fundamentals. However, near term volatility and uncertainty on back of rising US yields, depreciating rupee, has led to muted flows since April 2024.
Global bond yields also cooled off with the benchmark US 10-year bond yield down by 18 bps on the back of relatively softer economic data.
“Going ahead we believe that RBI is likely to be on a long pause and is likely to start cutting rates only after the developed market central banks start their rate cutting cycle. Given the current growth - inflation dynamics in India, we believe rate cuts will start from Q4-FY2025 onwards,” said Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund.
Markets tend to react before the start of a rate cutting cycle, and any retracement in yields offers a good opportunity to investors to increase their allocation to fixed income, as real and nominal yields remain attractive with favourable demand-supply dynamics playing out in the sovereign bond market, Pal added.
Motilal Oswal Private Wealth suggests core allocation should be tilted towards duration through active and passive strategies to capitalize on evolving fixed income scenario.
“We reiterate our view to have a duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in the next 1-2 years,” it said in a report.
It suggests 65% - 70% of the portfolio can be invested in a combination of actively and passively managed debt strategies and Equity Savings funds or Conservative multi asset funds which aim to generate enhanced returns than traditional fixed income with moderate volatility through a combination of equities, arbitrage, fixed income, commodities, REITs/InvITs.
To improve the overall portfolio yield, 30% – 35% of the overall fixed income portfolio can be allocated to select high yield NCDs, Private Credit strategies & REITs/InvITs, it said.
For liquidity management or temporary parking, investments can be allocated to Floating Rate (minimum 9-12 months) Arbitrage/Ultra Short Term (minimum 6 months) or Liquid (1-3 months) or Overnight (less than 1 month) strategies.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
