Fixed income market outlook 2017 during various geo political situations

• We believe that slowdown in growth (aftermath of demonetization) and expected soft inflation could probably leave room for rate cuts by the RBI, which could augur well for duration strategies in 2017.
 • There were credit concerns on individual companies during 2016, however, improving credit ratio seems to indicate that we broadly appear to be in a credit upgrade cycle, though it could take time for credit cycle to pick up. Anticipated fall in the lending rates post the currency swap exercise (increase in bank deposits) would help to bring down cost of capital for Indian companies, which in turn may bode well for the improvement of the credit environment and thus benefit accrual strategies.
The liquidity in the banking system has improved post demonetisation which would henceforth result in lower deposit and lending rates.
• Given the cash rich nature of our economy, we could see some slowdown in the overall economic activity thereby weighing on the GDP growth.
 • The trade-off between 1) likely positive impact of demonetization in form of lower interest rates over medium to long term and 2) pick-up in macroeconomic growth, once the consumption gathers momentum, will be instrumental in shaping up the direction of interest rates in 2017.
• Given the good monsoon season and expected slowdown in consumption post currency replacement program, we believe that March’17 inflation could undershoot RBI’s target of 5%.
 • Conversely, the RBI seems to be concerned about inflationary risks. In its Dec monetary policy review, the RBI surprised by leaving policy rates unchanged stating that growth pain on account of demonetisation is ‘transitory’ and that there is enough demand in the system to make it worry over inflation. Going ahead, the RBI will assess durability of the fall in inflation for implementing further interest rate cuts. The rupee has depreciated close to 3% against the US dollar, however, it was among the better performing emerging market currencies in 2016.

While higher crude oil prices and expectations of stronger U.S. growth coupled with earlier and more aggressive interest rate hikes in the US may impact INR, however, contained twin deficits, improving domestic macroeconomic indicators and RBI’s reasonable foreign exchange reserves may provide some support. Although India is in a relatively better position among the emerging economies, there are risks which can weigh on the Indian bond markets.


posted by,

saket kumar singh (Founder)
Lakshya wealth services 

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