US data released over May 2023 seems to indicate that the Fed may not be completely done with further rate hikes, though the US Central Bank appears inclined to pause in June. Post May 2023 data, global markets now largely seem to be aligning with US Central Bank rate forecasts for 2023.
Saudi Arabia (Saudi) announced an extra voluntary 1M B/D oil output cut for July 2023 and maintained that it would do whatever is necessary to bring stability to the oil market. The unexpected Saudi action and suspense over this cut being further extended by them, could set a floor for oil prices over the next few months.
Post the surprise pause in April, the RBI will meet over 6-8 June, 2023 to review the monetary policy, where it is widely expected to maintain a “status quo” on the policy repo rate and also continue with the “withdrawal of accommodation” policy stance (base case). Near term data is expected to be soft and thus supports a pause by the RBI, but potential El Nino impact on the monsoon, food prices and future inflation is likely to stop the RBI from premature easing of policy. We continue to expect 75 bps (100 bps = 1.0%) of cumulative rate cuts by end 2024 with the first-rate reduction by early 2024.
After the initial dip in yields in the early part of May 2023, bond yields largely traded in a narrow range. Bar any unexpected triggers from the June 2023 RBI MPC meeting, markets are likely to trade range bound. The RBI’s decision to withdraw the highest denominated banknote from circulation is expected to support money market and short-term yields. Like in the US, India local markets too seem to have reduced expectations of a repo rate cut in 2023.
We moderately added duration across funds by increasing exposure to benchmark government bonds and ~3 year AAA rated credits in the public sector space.
We anticipate duration funds to deliver superior risk adjusted returns as compared to non-market linked fixed rate products.