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Market Outlook

Debt markets yields moved up predominantly due to global factors, tight liquidity conditions in the domestic markets and Indian bonds non inclusion in the global indices. The spread between one year and ten year which was around 90 basis points compressed to 60 basis points due to tight liquidity conditions and expectation of terminal repo rate moved to 6.50 % from 6 % levels. RBI has projected GDP growth at 6- 6.5 % and CPI inflation to average 5.2 % for the next financial year. In the post pandemic era, RBI expect real rates to average 0.8% - 1% over one-year average CPI inflation. As per this analysis, the terminal repo rates should be 5.2 + 1 = 6.25 %. Market is factoring terminal repo rates of 6.5 % and swap market is pricing repo rates at 7 % levels. The one-year T bills rates are trading at 6.8% , 2-year G S sec at 7.10 % and three year at 7.30 % levels. These levels are factoring repo rate hikes well in excess of 6.5 % levels. The short end of the yield curve is attractively priced giving good carry over overnight rates.

FUND POSITIONING

Post MPC, the interest rates above 4 years reflected a flat yield curve. The Tata Short-Term Bond Fund is predominantly invested in one-to-three-year segment to capture accrual income. Within this segment, we are tactical overweight in government securities compared with corporate bonds due to spread compression and tight liquidity conditions. Any liquidity injection measures by RBI should benefit the short end of the yield curve. Funds like Tata Floating rate Fund expected effective duration to be less, and accruals expected to go up. The fund benefits from the increasing accruals. Others like Tata Gilt Securities Fund, remained constructive over medium to long term.

Tata Money Market Fund has a maturity cap of 12 months and can invest only in Money Market instruments viz. CP/CD and T-Bills etc. The fund would continue to decrease maturity gradually. Similarly, Tata Banking and PSU Debt Fund has invested 100% of its assets in Banking/PSU debt and Sovereign and is positioned to gradually reduce duration in current Interest rate Environment, while generating alpha through tactical G-sec call

Target Maturity Funds like Tata Nifty SDL Plus AAA PSU Bond Dec 2027 60-40 Index Fund and Tata CRISIL IBX Gilt Index – April 2026 Index Fund offer avenue to deploy long-term money, with the current increase in yields on the back of rate hike cycle to address Inflation

Inflation

US CPI inflation for the month of August came at 8.30% versus expectations of 8.10%. The personal consumption expenditure came at 6.6 %, even though gasoline prices fell during the month due to lower oil prices. The US federal Reserve Committee in its monetary policy, hiked Fed Fund rates by 75 basis points and increased the expected terminal Fed Fund Rates to 4.50- 4.75 range. The Fed Chairman in his interaction with the press, indicated the priority is to bring CPI inflation back to 2 % levels, even if it risks a recession in the economy.

Monetary Policy

RBI in its Monetary Policy raised its repo rates by 50 basis points on expected lines. RBI maintained its stance of calibrated tightening and indicated its resolve to hike rates in subsequent meeting, as CPI inflation reading is expected to be above 6 % in the coming months

GDP Growth

RBI reduced its GDP growth forecast for current year to 7 % from 7.2 %, however this was more a statistical exercise as the first quarter GDP has come at 13.5 % versus RBI forecast of 16.2 %. Subsequent quarter nos was revised upwards. RBI expect growth to remain strong due to good monsoon, government capex push, pent up demand due to covid restrictions.

Currency

As per RBI Governor, 67 % of the fall in Forex Reserves is due to revaluation effect and RBI has only sold 24 billion USD in the current financial year. Current account deficit was offset by banking capital flows of 19 billion USD, this led to balance of payment surplus of 4.6 billion USD. The rupee depreciation has been around 10 % against the dollar which is lower than depreciation of advance economies like EURO 14 % , British pound 16 % and Yen 30 % as on 5 th October 2022

Liquidity•

* Liquidity in the banking system traded above the repo rate and closer towards the MSF rates in the last week of September due to advance tax outflow, GST collections of Rs 1.47 Lakh and credit growth in    the economy.

* This led to government balance with RBI increasing to Rs 4 Lakh crores. System liquidity has improved due to month end spending by government. Overnight rates are now trading at repo rates

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