The US Fed expectedly held the benchmark rate in the 5.0% - 5.25% target range in the June 2023 FOMC meeting. The FOMC however increased its median rate forecasts to 5.6% and 4.6% by end 2023 and end 2024 respectively with a strong majority of FOMC seeing 2 or more rate hikes by the year end.
The People’s Bank of China (PBOC) lowered the key 7-day reverse repo rate by 10 bps (100 bps = 1.0%) to 1.90% thereby signaling the government’s awareness and willingness to support the post Covid tepid recovery. China’s monetary policy divergence as compared to Central Banks of advanced economies risks further weakness in the Chinese Yuan and acceleration of capital outflows.
The RBI’s decision to keep the policy repo rate unchanged at the June 2023 MPC meeting was in line with expectations, but the Central Bank’s strong commitment to ensure a durable alignment of inflation to the 4% inflation target disappointed those who had hoped for a “dovish pause” from the RBI.
We continue to expect the RBI to remain on an extended pause and expect the Central Bank to have a small window to cut the policy repo rate in Feb 2023. Furthermore, we expect a cumulative 75 bps rate cuts by Dec 2024.
The benchmark 10-year GOI Bond was trading sub 7% in early June but has been trading with an upward bias post the RBI June 2023 MPC meeting. The Jul 23-Sep 23 quarter government net bond supply remains high as compared to the previous quarter and follow-through demand from the last financial year end flows has largely been met. We expect the benchmark 10-year GOI bond to trade in the upper half of the 6.90% - 7.20% range over the short term.
We reduced duration across our funds by replacing exposure to long maturity benchmark bonds with medium term on-the-run bonds. We prefer sovereign bond exposure over AAA rated credit and will look to add duration on a further uptick in yields.
With a base case of a cumulative 75 bps rate cut by Dec 2024, we feel duration funds have the merit to provide superior risk adjusted returns as compared to passive non-market linked fixed rate products.