Debt Funds Offer A Very Attractive Proposition To Investors

Puneet Pal Head Fixed Income), PGIM India Mutual Fund

What’s your outlook on the Indian debt markets and yield curve post the RBI’s recent rate hike in its policy rates? Also, how will the forthcoming rate hikes by the Federal Reserve affect the Indian debt markets?

We have seen bond yields rising post the Monetary Policy Committee (MPC) meeting on February 8 as the policy tone was slightly hawkish and the monetary policy stance of ‘withdrawing accommodation’ was left unchanged. We expect the yield curve to stay flat. Though we would attribute a high probability of another 25 bps increase in the policy repo rate, we think we are in the last leg of the interest rate hike cycle and policy rates are close to peaking out. Apart from domestic economic variables, global interest rates and movement in global bond yields impact the Indian interest rates and yields like any other emerging economy. The increase in Federal Reserve fund rates beyond 5.25 per cent can pressurise our yields upwards as currently the market is discounting a terminal Federal Reserve fund rate of 5.25 per cent.