The 10-year G-Sec yield was trading down in the first 20 days of December, while it recovered in the latter 10 days of the month. It declined from 8.75% on November 30, 2011 to 8.28% on December 20, 2011. From 8.28% on December 20, 2011, it recovered 27 bps and closed at 8.55% on December 30, 2011, which was the last working day of calendar year 2011. It decreased due to positive sentiments in bond market on account of benign inflation and continuing buybacks of Open Market Operations (OMO) by RBI. Later it recovered on the announcement by the Government of borrowing additional Rs. 40,000 crore to make up for the shortfall in revenue receipts and poor disinvestment realization in the current fiscal year.
The inflation came at 9.11% in the month of November 2011 as compared to 9.73% for the previous month October 2011. The main reason of inflation moderating was the falling food prices and primary articles. The IIP data fell for the first time on month-on-month basis since 28 months. It came to -5.1% on a month-on-month basis for October 2011 on the back of falling consumer demand and declining corporate investments. With a slowdown in economy and visible signs of easing inflation, RBI has started focusing on growth from its anti-inflationary stance. RBI has paused hiking interest rates in its recent Mid-Quarterly Review of Monetary Policy, which was held on December 16, 2011. The focus has started to shift to growth, since, as explained by the RBI, “downside risks to growth have clearly increased”. We expect the RBI to continue to ease liquidity through OMO purchases. However, fiscal condition remains the biggest concern and as possibility of higher fiscal deficit comes closer, we might see some downward pressure on G-Sec yields.
We would like to advise investors to invest in Long-Term Debt Funds as they are expected to give higher returns as compared to other categories. We expect interest rates to fall in the near future, and Long-Term Debt funds should see bond prices reacting in a larger magnitude due to their higher sensitivity to interest rate changes. With expectations for both inflation and interest rates to trend lower, investors may benefit by investing in longer term bond funds.
The Research Team is part of iFAST Financial India Pvt Ltd
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