Amid global economic uncertainties, India’s equity and fixed income markets are showing signs of cautious optimism. Over July 2024, India’s 10-year bond yields have rallied by more than 10 basis points (bps), while US 10-year yields have dropped by more than 35 bps. The easing of banking liquidity has also led to a rally of 10-25 bps in the short-term/money market curve.
Devang Shah, Head of Fixed Income at Axis Mutual Fund, noted that the current market positioning heavily favors a bond rally, which could result in increased volatility if the Reserve Bank of India (RBI) introduces unexpected policy changes. “Any surprises from RBI policy, especially on OMO (Open Market Operations) sales or MSS (Market Stabilisation Scheme) announcements, can lead to volatility and a rise in yields by 10-20 bps,” Shah explained.
Shah advised investors to focus on maintaining a duration-focused portfolio and to exercise patience for anticipated rate cuts expected in the latter half of the fiscal year. He recommended short to medium-term funds with tactical allocations to gilt funds. “With expectations of lower Q2 CPI, favorable demand-supply dynamics for bonds, and continued flows from FPI, we continue to advise short to medium-term funds with tactical allocation to gilt funds to our clients,” he added.
Shreyash Devalkar, Head of Equity at Axis Mutual Fund, expressed confidence in the domestic market, highlighting the government’s consistent focus on capital expenditure, which has grown by 17% year-on-year. This growth, coupled with fiscal discipline, is expected to spur private investments and create a positive environment for the overall capital expenditure cycle.
Devalkar recommended overweighting sectors such as infrastructure, manufacturing, utilities, and transport, which are likely to benefit from government initiatives. He also highlighted sectors aligned with government policies, including energy, defense, and power, as promising investment avenues. However, Axis Mutual Fund maintains an underweight position on export-oriented sectors due to the global economic slowdown.
“Overall, we remain positive on the markets and continue with our themes of being overweight on consumption and investments while being underweight on exports. Always remember, markets may go through cycles, but it is important to stay invested,” Devalkar advised.
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