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Below the Weekly View on FYI Fixed Income by Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund 

 

Expect the 10yr bond yield to trade in a range of 6.20% to 6.50%

Our View

The current stance of RBI to support growth and focus on transmission means that RBI will keep the banking liquidity easy. Coupled  with this easy liquidity stance and expectations of a longish pause on rates, we believe that the Corporate bond Curve of 3-6 yrs maturity  presents a decent investment opportunity in the current circumstances. The current spread of 65-70 bps between the AAA 5yr maturity  PSU bond yields with the corresponding maturity G-secs is attractive from a historical spread perspective whenever the banking system  liquidity is surplus. In this context, we believe that Corporate Bonds in the 3-6yr maturity segment present a relatively attractive  investment opportunity.  
Investors can continue to allocate to Short Term/Corporate Bond Funds having portfolio maturity up to 6yrs while being tactical in their  allocation to duration through Dynamic Bond Funds. Investors should have an investment horizon of 12-18 months while investing.  Money Market yields of up to 1yr are also looking attractive from a relative risk-reward scenario and investors can look to allocate in that  segment also. We expect the 10yr bond yield to trade in a range of 6.20% to 6.50% over the course of the next one month.

 

Indian Markets:

Indian bond yields continue to inch higher with a steepening bias. The bear steepening trend accentuated after the MPC meeting on  6th June as markets started to factor in the end of the rate cutting cycle as the MPC changed the monetary policy stance back to  “Neutral” from “Accommodative” while mentioning that after reducing the policy rate by 100bps in quick succession there was very  limited room for monetary policy to support growth.  
Yields have continued to inch higher since then on profit booking and aversion to take fresh positions. The MPC minutes spoke about  the need to support/boost growth with Inflation remaining benign. Most MPC members stressed on the need to revive private investment.  The front loading of rate cuts was to quicken the transmission process. On stance change, limited space for further easing seemed the  main reason while offering flexibility to react to incoming data. Overall, the basis of front loading rate cuts was to quicken policy  transmission to support growth amidst benign Inflation. Though MPC is likely to stay put on policy rates over the next couple of policy  meetings and focus more on effective transmission of rate cuts done so far, there can be some incremental space for cuts if Inflation  and /or growth falls below the RBI’s forecast. This was also hinted at by the RBI governor in a recent media interaction.  
Monsoon rains improved, with the weekly rainfall at 50% above long term average though the cumulative rainfall, till June 20, remains  in deficit at 0.9% below long term average. On a cumulative basis, rainfall was above-normal in Central, North, and West India while  below-normal in East and South India. Out of the 36 sub-divisions, till date, 14 have received deficient rainfall, 11 have received normal  rainfall, and 11 have received excess rainfall.  
As of June 13, the total kharif acreage was 1.7% higher than the same period last year. Compared to same period last year, rice sowing  was 13.3% higher at 0.5 mn hectares. Oilseeds acreage was 37% higher at 0.2 mn hectares while pulses acreage at 0.3 mn hectares was 18% higher than last year. Coarse cereal acreage was 0.2% lower at 0.3 mn hectares. Sugarcane acreage was 0.3% higher at 5.5  mn hectares, and cotton acreage was 0.7% lower at 1.3 mn hectares.  
Basin-wise reservoir levels has been surplus in June. Among major river basins, Cauvery (South), Ganga (North and East), Godavari (West  and South), Krishna (West and South), Narmada (Central and West), Tapi (Central and West) and West flowing Southern rivers were  surplus. Indus (North India) and Mahanadi (Central and East) were deficient. Overall, basins and reservoirs levels were 39% above  long-term average for week-ending June 19.
Goods trade deficit narrowed in May to US$21.9 bn from April levels of US$26.40 bn, led by a sharp fall in oil imports with exports  remaining steady. Services trade surplus remained broadly steady at US$15.3 bn. CPI Inflation continued to trend lower for the seventh  consecutive month in May, falling to 2.82% in line with expectations of 2.92%. Softening in Food inflation contributed to lower CPI  inflation. Core inflation came in at 4.20%. Stable core inflation and optimism regarding food inflation remaining benign have led  analysts to project FY 26 average CPI inflation at 3.50% (a tad lower than RBI’s projection of 3.70%). WPI inflation also slowed to a  14-month-low 0.39% YOY. Food basket in WPI moderated to 1.80%, lowest since Nov 23. Core WPI also edged lower to 0.80%. WPI  inflation is expected to remain benign though one needs to watch out for the movement in commodity prices, especially Brent.
The benchmark 10yr bond yield ended the week at 6.38%, higher by 10bps from the start of the month. The benchmark 5yr yield was  also higher by 14 bps and so was the case with the longer end of the curve. Thus, post the MPC policy meeting, yields have risen by 14  -18 bps across the curve.  
The OIS curve has been relatively stable with the 1yr OIS yield at 5.52%, lower by 7bps since the start of the month while the 5yr OIS  yield has risen by 7 bps since the start of the month to 5.75%, thus continuing with the steepening trend.
INR weakened to 86.59 from 85.58 from the start of the month as brent crude rose by 20% during the month on escalating geo  political tension in the middle east.  
FPIs continued to sell Indian fixed income with more than US$2 bn of outflows in June. 

 

International Markets:

Globally, bond yields stayed stable as the US Fed and the BOJ held rates steady amidst continued geopolitical uncertainty. US  benchmark 10yr bond yield ended the week at 4.37%, 3 bps lower than the start of the month levels of 4.40%.

 

 

 

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