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Below is the Views On Fixed Income By Quantum Mutual Fund
Fixed Income View:
The Bond market was expecting an increase in the fiscal deficit given the fall in economic growth and thus the fall in tax collection. The government having announced a cut in corporate taxes in September, the tax collection situation became more challenged.
The government was also under pressure to not cut its expenditure to meet the fiscal deficit, as any cut in expenditure will further impact the growth sentiment. In that background, the bond markets expected the Fiscal Deficit to be increased for this fiscal (FY 20) and for FY 21.
The government increased the fiscal deficit for FY 20 to 3.8% of GDP from the budgeted 3.3% of GDP and pegged it at 3.5% of GDP as against the target of 3.0% of GDP.
Increase in fiscal deficit of such magnitude would mean that the government will borrow more from the bond markets leading to a rise in government bond yields. The 10 year government bond trading at a yield of 6.5% as against the Repo Rate of 5.15% was indicative of the worries of the bond market on the fiscal situation.
Bond yields should ideally increase in the medium term but the government has tried to provide some relief to the bond market by announcing a large increase in investment limits for foreigners in corporate bonds. They have also paved way for inclusion of India’s government bonds in global bond index by allowing foreigners to buy certain bonds without any limit.
If the above steps do come about and leads to higher investments by foreign investors in Indian bonds, we may see the bond markets being supported and bond yields may well fall. Also, if the RBI continues its own version of “Operation Twist” – where they buy long maturity government bonds and sell short maturity bonds, it may continue to support the government borrowing programme and prevent bond yields from rising.
Overall, as always, we will continue to advise that investors should choose safety and liquidity while investing in debt funds and investors investing in long term bond funds/dynamic bond funds, should take a long term view and be prepared to face volatility in their returns
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