RBI may cut rates if global central banks turn dovish

We do not infer any strong messaging from RBI’s status quo. RBI couldn’t have possibly cut or hiked the rates when inflation is within range, growth is comfortable, and the external sector is stable. If global central banks turn dovish then we expect RBI to cut rates in the coming months, provided there is no spike in domestic inflation. But we do not expect this action to come in the immediate future.

We expect the Indian yields to gravitate lower. Inflation is within range and the demand for G-secs is strong. Thus, there is no strong argument for rates to remain elevated. While we expect the yields to trend lower, the timing will be difficult to forecast. Moreover, for the past few years RBI has overseen a relative calmness over the financial markets — be it rupee or yields. Thus, going forward we should see stable yields movement — similar to what we have seen in the recent past.

With half of India’s inflation basket comprising of food, it is always difficult to forecast inflation. In fact, RBI and professional forecasters have usually struggled to predict inflation in India. Forecasting inflation is akin to forecasting vegetable, cereal, pulse prices, which is prone to error. However, pressures on inflation going forward should ease as oil prices have cooled, domestic consumption is probably going to slow down, global economy faces a year of lower growth, and global food prices have eased.

Globally, rates will continue to come down, though each country’s dynamics will guide the quantum. When the markets were overly optimistic about cuts earlier this year, there were hardly any voices stating so. It is very likely that this time markets have not gone overboard because Fed thas been on pause for long. The December policy was Chairman Powell’s most dovish FOMC in this rate hiking cycle.

Fed will certainly look at inflation and unemployment data before effecting cuts. It is most probable that Fed will cut rates even if inflation does not reach the target of 2 per cent. Falling growth and demand in the US may also play a role in determining the timing for the cuts.

Debt as an asset class is very attractive now. From a risk versus reward perspective, debt provides great value. In all probability, we have reached the peak of the rate cycle. Thus, a debt investor should be able to lock in not just a high coupon rate, but also take advantage of capital gains when yields come lower.

Investors should look to add longer maturity funds into their portfolio, preferably in dynamically managed funds where the fund manager can change maturity depending on his view. While the yields are moving lower, they may hit the floor any time in 2024. At that point, a dynamically managed fund will be able to lower the risk, but a fund mandated to run long-duration will not be able to. Unless the investor is savvy enough to decide when yields hit bottom, it is better to leave such decisions to the fund manager.

Yes. We have seen higher issuances lately throughout the maturity cycle. These issuances will most probably continue in the next quarter.

Yes, and no. If a credit risk fund is well managed, it will perform irrespective of when one enters. Having said that, investors need to be wary. The global economy is in a slowdown phase. RBI has highlighted the risk of NBFCs overstretching, and we see pressures on some sectors having links with the global supply chain. The credit segment has probably worsened since last year. While we don’t think that there are red flags, we remain alert.