Interest rates paid by retail and commercial borrowers haven’t really come off to reflect the extent of rate cuts effected by RBI over the last 12-15 months. RBI is now increasingly focusing on enabling effective transmission.
In addition to ensuring sufficient liquidity in the system, RBI is also addressing the demand-supply mismatch on tenors of papers issued, which can bring down yields at the long end.
Term premiums are way too high and as RBI measures take effect, we should see 10 yr – 30 yr bond yields come off to some extent. 10 yr yields dropping from 6.7% to 6.5% is a high probability.
If US resumes cutting rates under a new Fed leadership,that can enable India among other countries to cut rates, given that inflationin India continues to be benign. Should that happen, expect further drop in 10yr yields – perhaps even down to 6% - depending on extent of rate cuts.
The best risk adjusted return prospects right now are inthe 1-3 yr corporate bonds segment, where spreads are attractive.
Investors with 2 yr + horizon and with appetite for some volatility can consider long duration funds like gilt funds and income funds as the seasonal financial year end hardening of yields can present good entry points into a potential drop in long bond yields over the next 12-18 months.
Income + Arbitrage funds continue to be a strong candidate for investor portfolios on a risk adjusted as well as tax efficiency basis.
Bhupesh says that while Multi Asset Allocation Funds provide a convenient and tax efficient way to include debt into investor portfolios, there is a strong case for investors to consider pure debt funds as that’s where they can pick and choose the right fund for their risk appetite and time horizon.