Fixed Income

Overall, the tax collection has been encouraging and surprisingly fiscal deficit is kept under control. This will further improve as economy is also opening up slowly post the June quarter. Many broad economic indicators like petrol/diesel consumption exceeded pre-Covid levels in July. Manufacturing PMI has moved up from 48.10 in June to 55.30 in July 2021.

There has been a hardening of yields across the board in India where as globally yields are coming down and especially with the US Fed where the yields on the 10 Year Bond have reached 1.16%. India has a typical problem as RBI has to manage the Government borrowing keeping the overall cost under control and we expect that the 10 Year G-Sec will slowly move up from 6.20% to 6.50% by the end of this FY.

However, the rise in yields ahead of the policy puts some pressure on the RBI. It wants to keep yields low to aid the government borrow at a cheap rate, but at the same time, it has to keep the domestic investors happy at a time when the global investors are withdrawing their debt investment from India. Presently, the RBI is letting the market forces play out the yields, while ensuring that the movements remain orderly.

Inflation is constantly on the rise, but mainly on the supply side as the cost of oil, commodities and food items are on the higher side. The view remains constant to stay away from any duration strategy funds and look at short term strategy and wait for investing in any accrual or duration strategy.

The next US Fed meeting will be critical and the RBI too, is likely to keep the rates constant on its meeting on 6th August 2021. Gradually, we feel that yields will move up on short and long end funds for the foreseeable future.

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