The recent failures of Silicon Valley Bank (SVB) and Signature Bank in the US and fears of contagion risk spreading to the financial sector have seen a rally in global capital markets, especially debt markets, in the past few days.
The priority for the US Federal Reserve may have shifted to financial stability and may now take priority over high inflation. loan Market The market has turned optimistic about the US Fed holding or reducing rates even before its earlier estimate.
Debt markets in India as well as globally have been under pressure over the past two years as central bankers raised interest rates to combat record high inflation.
Debt market an attractive investment option
however as we near the end rate hike Analysts at brokerage house and research firm ICICI Direct said that with cycles and yields rising significantly, the debt market has become an attractive investment option.
The brokerage said, “The Indian debt market has become attractive after a steady rise in yields over the past few years.
In India, the rate hike cycle is nearing an end with one last rate hike of 25 basis points expected in April 2023. Since debt markets yield higher returns when invested near the peak of the rate cycle, the year 2023 could mark a comeback. year of the debt markets in India as well as globally.
Investment Opportunities
The brokerage believes that investors should consider the lump sum investment opportunity. Both accrual funds and duration funds provide investment opportunities.
“Aggressive investors may consider allocating more amount in dynamic mutual funds or long duration funds while conservative and moderate investors may consider allocating more amount in medium duration funds/corporate bond funds,” the note said.
“A long-dated product will help shield from locked-in coupon or interest rates and the interest rate cycle. Long tenure (20-25 years) government securities offering returns at around 7.6% are also good long term fixed income investment option, offering higher earnings along with offsetting the reinvestment risk .
India’s rate hike cycle is at its peak
RBI has increased repo rates by 250 bps from 4.0% to 6.5% for the period May 2022 to February 2023 in the current rate hike cycle. With CPI for FY23-24 estimated at 5.3%, the repo rate at 6.5% gives a real rate of 1.20% which falls within the RBI’s target range of 1%-2%.
However, until recently, with global central bankers especially the US Federal Reserve continuing their accommodative stance, the Indian debt market also started pricing in another hike in policy by the RBI to 6.75% in April 2023. .
However, yields in the US especially have declined over the past few days with the 2-year yield falling by over 50 bps from 4.4% to 3.9%, while the 10-year yield by over 25 bps from 3.7% to 3.5 % is less than.
The US Federal Reserve is now expected to cut rates by 100 bps in calendar year 2023 after a last possible rate hike of 25 bps in the March 22, 2023 policy meeting.
Declining commodity prices, especially crude oil prices, have also improved the inflation outlook. Hence, the brokerage believes that RBI will maintain status quo on the benchmark repo rate in its upcoming policy meeting and in the near future. Accordingly, the terminal repo rate is likely to be held at the current rate of 6.5% in the near term.
The views and recommendations given above are of individual analysts or broking companies and not of Mint,
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