The ‘summer of 2024’ started off with a cheerful vibe, with major sporting events like the Olympics captivating global attention. However, the sunny days quickly turned cloudy as unexpected shifts in global markets cast a shadow over the world’s financial landscape.
Market Reactions and Central Bank Policies
Global bond yields trended downwards in July, a positive sign, driven by encouraging US economic data. The European Central Bank (ECB) maintained its key policy rates, while China’s Central Bank (PBOC) surprised markets by lowering key interest rates, reflecting its ongoing economic adjustments. The US Federal Reserve (Fed) also kept rates steady but hinted at potential rate cuts in the near future. However, the Bank of Japan (BOJ) shocked markets by increasing its policy rate, reducing bond purchases, and signaling further potential rate hikes.
Impact of Market Movements
These divergent policy moves, coupled with weak US employment data, created a perfect storm of uncertainty. The initial days of August saw a reversal of some Japanese Yen carry trades, leading to a sell-off in risk assets. This volatility is likely to persist for some time.
India’s Fiscal and Bond Market Outlook
India’s Union Budget in July was welcomed by the local bond markets. The government’s commitment to fiscal consolidation, with a projected budget deficit of 4.9% of GDP for 2024-2025 and a further reduction below 4.5% in the following year, is expected to attract favorable attention from global rating agencies. This could potentially pave the way for an upgrade in India’s credit rating in the coming years. Reflecting these positive sentiments, the 10-year Indian sovereign bond (GSec) closed at 6.93% in July, down by 7 basis points for the month.
RBI’s Policy Stance and Future Projections
The Reserve Bank of India (RBI) maintained its ‘status quo’ policy rate in its August 2024 meeting, aligning with market expectations. However, the RBI highlighted the divergence between headline inflation and core inflation, emphasizing the potential risks posed by persistent high food inflation. This signaled a cautious approach and tempered market optimism regarding an imminent shift in the policy stance or rate reductions. On a positive note, global cues suggest that the Fed is likely to cut rates in September, followed by further reductions throughout the rest of the year. Furthermore, a planned revision to the Consumer Price Index (CPI) in India could potentially lead to lower headline inflation readings in the future due to a revised weighting of food items. This could provide room for the RBI to consider easing its policy repo rate. Based on current trends, we anticipate a shift in the RBI’s policy stance in December 2024 and a reduction in the policy rate in February 2025.
Outlook for Investors
With interest rates at peak levels and expected to decline in the coming quarters, investors may find actively managed duration funds attractive. These funds offer the potential for superior risk-adjusted returns compared to fixed-rate products, making them a compelling option for those seeking to navigate the current market landscape.
