India now has the 2nd highest real policy rate for countries where infaltion is within the Central Bank's traget range. (See image)
Here is a thread🧵on why it is time to buy duration in your debt portfolios.
Source: DSP Converse (dspim.com) by @sandeepy02
Here is a thread🧵on why it is time to buy duration in your debt portfolios.
Source: DSP Converse (dspim.com) by @sandeepy02
1. Inflation is now within RBI's inflation target band of 4±2 with decelration projected ahead. There are concerns regarding core inflation being sticky, but with series of rate hikes working its way into the system, the risks are evenly balanced.
2. RBI has rasied rates by 250bps and is probably now aligning itself to a pause in global rates cycle led by US Fed.
With US infaltion gradually declining, we are closer to an end to rate hikes. The timing could be off, but we may be closer to peak policy rates, not far.
With US infaltion gradually declining, we are closer to an end to rate hikes. The timing could be off, but we may be closer to peak policy rates, not far.
3. Favorable Demand-Supply: Announced govt borrowing for FY24 is just 8% more than FY23.
Demand for G-Sec by Banks/Financial institutions expected to grow at faster pace as deposit growth in picking up & credit growth is robust. The Net borrowing for FY24 appears comfortable.
Demand for G-Sec by Banks/Financial institutions expected to grow at faster pace as deposit growth in picking up & credit growth is robust. The Net borrowing for FY24 appears comfortable.
4. RBI OMOs: In FY24, RBI will finally purchase govt bonds, after a gap of more than 1-year.
RBI exhausted its short term G-sec through OMO sales. For natural growth in B/S and liquidity mangement RBI may resort to OMOs in FY24.
Read the reasons in teal box in the image.
RBI exhausted its short term G-sec through OMO sales. For natural growth in B/S and liquidity mangement RBI may resort to OMOs in FY24.
Read the reasons in teal box in the image.
5. Bond index inclusion chatter: An unlikely event, but with large impact. If risk of yields spiking up is very low, it is prudent to be invested to be able to benefit from such tail events.
When China was included in global bond indices 10yr yields fell 80bps.
When China was included in global bond indices 10yr yields fell 80bps.
In conclusion: The time has come to buy duration with risks on evenly balanced.
We have introduced a number of passive index funds from DSP stable and are in process of introducing an active constant maturity fund.
Stay tuned.
We have introduced a number of passive index funds from DSP stable and are in process of introducing an active constant maturity fund.
Stay tuned.
What is duration?
Bond duration is a measurement of movement in bond prices if and when interest rates move.
Bonds with higher duration (or simply more time to maturity, tough there is a technicality) are more sensitive to changes in interest rates.
See image
Bond duration is a measurement of movement in bond prices if and when interest rates move.
Bonds with higher duration (or simply more time to maturity, tough there is a technicality) are more sensitive to changes in interest rates.
See image
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