Market hopes of a Fed pivot were belied at the Fed’s annual Jackson Hole economic symposium, with US Fed Governor Powell cautioning against any premature loosening of monetary policy and maintaining that the US will likely require a restrictive policy for some time.
Based on the past guidance, the ECB is expected to increase its key policy rates in September. Market consensus is for a 75 bps (100 bps = 1.0%) increase in September, but with the ongoing geopolitical challenges facing the EU, the ECB will need to find a right balance on the future rate path thereafter.
Led by the property woes, China’s monetary policy continued to diverge from that of global central banks, with the People’s Bank of China (PBOC) reducing key rates across the curve. China’s fiscal as well as monetary policies are expected to remain accommodative over the foreseeable future.
Post three consecutive rate hikes, the RBI is expected to increase policy rates by 25 bps to 5.65% at the MPC meeting in end September. We continue to see India’s terminal policy rate near 6.0%, and bond markets have already priced the policy rate trajectory.
Post the Jackson Hole symposium, US markets have course corrected, but Indian markets have remained resilient led by renewed hopes of Indian sovereign bonds getting included in global sovereign bond indices. RBI is continuing with its withdrawal of accommodation stance, and with credit growth outpacing deposit mobilization; banks have increased their reliance on money market issuances to fill the credit-deposit gap. We see value in the shorter end of the yield curve on a risk adjusted basis and our preference remains for sovereign bonds over high grade credit.
We have added exposure to the 2–4-year maturity segment and hope to strategically increase allocation to this segment. We intend to make tactical investments in liquid sovereign bonds to take advantage of market opportunities.