FIXED INCOME OUTLOOK JUNE 2016
% 10 yr G-Sec : Last 1 year
5.4% CPI Inflation : Last 1 year
Repo : Last 1 year
• While further policy rate cuts are likely limited, better transmission and changed liquidity stance, should lead to lower market rates over the next 12 months. • Investors with risk appetite should look to add duration in their bond portfolios while those with lower risk profile may look for shorter duration funds.
Indian bond markets were little changed for the month of May after witnessing a large postbudget rally in March and April. Benchmark 10 year ended the month of May at 7.5%. April CPI Inflation surprised negatively as inflation moved up to 5.4% from 4.8% in the previous month (mainly on account of food inflation). Core CPI nudged up as well to 4.9%. Broad inflation trajectory remains within the RBI’s comfort zone, and further cushion on inflation should come as food inflation moderates. RBI is expected to leave rates unchanged in its upcoming policy review in June.
10 year G-Sec yield
Following the announcement of its new liquidity framework, the RBI has initiated the process of adding system liquidity through open market operations (Approximately INR 40000 crores. of OMO’s done in the month of May). As a result system liquidity has improved significantly. Market yields have not reacted to the improvement in liquidity as this has been balanced with concerns on US rate hike and rising crude as well as inflation uncertainties before the onset of monsoon. The US Fed is widely expected to raise rates in its June meeting even as US and global growth remains tepid. Global bond yields continue to trade at the lower end of their range of the last 6 months. India’s external accounts are likely to remain comfortable even as the BoP surplus has narrowed in the absence of large portfolio inflows. India has seen significant addition to its foreign reserves over the last 2 years which provides it with high level of external resilience. The Rupee after a period of disproportionate strength in 2014, has been broadly tracking other Asian currencies in the last few months. India’s relative macro outperformance continues in a difficult global environment. Q4 GDP growth came at 7.9% which was better than the Q3 number of 7.2%. Growth was led by consumption while investment remained a drag. The gradual cyclical recovery should push GDP growth further over the next year. However given the output gap that exists, we do not expect the growth revival to have any immediate pressure on inflation. The yield curve continues to show a large positive slope relative to the flat curve that existed 1 year ago. The steepness is presenting an opportunity in the 3-5 year corporate bond segment. While further policy rate cuts are likely limited, better transmission and changed liquidity stance, should lead to lower market rates over the next 12 months.
AXIS SHORT TERM FUND •
The fund follows a high quality & low-risk strategy endeavoring to generate stable returns. It aims to capture opportunities in the yield curve spreads in the short duration segment. The fund tracks corporate bond v/s short dated G -sec spreads closely while making its allocations. The portfolio allocation continues to be in 3-5 year corporate bonds and money market instruments.
The portfolio stance is expected to benefit from the compression in spreads in the short to medium term segment of the curve.
The corporate bonds exposure remains in highly rated instruments.
The current duration of the fund is 1.7 years.
Modified Duration Why Invest?
Yield to Maturity *
Actively Managed Short Duration Fund with Daily Liqui