Global capital markets, particularly debt markets has seen a sharp turn around over the last few days on the back of the recent failures of Silicon Valley Bank (SVB) and Signature Bank in the US and fear of contagion risk spreading across the financial sector.
The priority for the US Federal reserve may shift to financial stability and could now take precedence over elevated inflation. Debt markets market has turned sanguine about US Fed pausing or cutting rates sooner than earlier anticipated.
Debt markets in India as well as globally has been under pressure since the last two years as central bankers hike interest rates to combat record high inflation.
Debt market an attractive investment option
However as we near the end of the rate hike cycle and yields are up significantly, debt market has become an attractive investment option, said analysts at brokerage house and research firm ICICI Direct.
«Indian debt markets has become attractive after the continues rise in yields in last few years. The yields across debt mutual funds have risen and offer excellent investment opportunity,» the brokerage said.
In India, rate hike cycle is near end with expectations of one last rate hike of 25 basis points in April 2023. Since higher return in debt market is made when investments are done near peak of the rate cycle, the year 2023 could mark the comeback year of debt markets in India as well as globally.
Investment opportunity
The brokerage believes that investors should consider lumpsum investment opportunity. Both accrual funds and duration funds offer investment opportunity.
“Aggressive investors may consider allocating higher amount to dynamic mutual funds or long duration funds while conservative and moderate investors may invest allocating higher amount in medium term funds/corporate bond funds,» the note said.
“Longer dated product will help lock-in coupon or interest rates and shield from interest rate cycle. The longer dated (20-25 year) government securities offering return at around 7.6% is also good long term fixed income investment option offering higher accrual while removing re-investment risk as well,» it said.
Rate hike cycle peaked in India
RBI in the current rate hike cycle has raised repo rates by 250 bps since May 2022 till February 2023 from 4.0% to 6.5%. With CPI for FY23-24 projected at 5.3%, Repo rate at 6.5% offers real rate of 1.20% which fall into RBI target range of 1%-2%.
However, till recently, with global central bankers particularly US Federal Reserve continued their hawkish stance, Indian debt market also started pricing-in one more rate hike by RBI in its April 2023 policy to 6.75%.
However, in last few days yields particularly in US has fallen significantly with 2-year yield down by 50 bps from 4.4% to 3.9% while 10-year is down by more than 25bps to less than 3.5% from 3.7%.
US Federal Reserve is now expected to cut rates by 100 bps in the calendar year 2023 after one last probable rate hike of 25 bps in its March 22nd 2023 policy meeting.
Fall in commodity prices particularly crude oil prices has also improved inflation outlook. Therefore, the brokerage believes that RBI will maintain status quo on benchmark Repo rate in its upcoming policy meeting and in the foreseeable future. Terminal repo rate accordingly is likely at current rate of 6.5% in the near term.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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