Domestic politics took centre stage in June 2024. The month began with a lower-than-expected majority in the Central Government (Lok Sabha) elections for India’s ruling dispensation and led to a coalition government in India after a gap of 10 years. The European Union (EU) went to polls soon after to elect the bloc’s new parliament –where the centre right faction held its ground, but the far-right bloc grew its presence at the expense of the liberals and the greens. The latest results not only seem to point to a strong shift in the political atmosphere in Europe as compared to the previous pre Covid elections in 2019 but also could be construed as referendums on national leaders. Indeed, in the aftermath of the EU parliament election results, President Macron called for a snap early legislative election in France and found his centrist party trailing the far right after the first round of voting. The recent UK elections saw the Labour Party winning with a landslide and sweeping away the 14-year rule of the Conservative Party. Meanwhile in the US, after a disastrous showing in the first presidential debate, calls for President Biden to step down as the presidential nominee have gained ground. US markets have reacted to the prospects of a Trump Presidency with higher bond yields as largely inflationary tariffs, a loose fiscal policy and a decisive shift towards deglobalisation could soon become a reality post the US Presidential Election.
The policy review meetings in June of major global central banks were largely on expected lines. The US Federal Reserve (Fed) expectedly maintained the policy target range and as anticipated reduced its forecast of rate reductions for 2024. The European Central Bank (ECB) too predictably lowered the policy rate by 25 bps (100 bps = 1.0%) and chose not to pre-commit to any rate path. The Bank of Japan (BOJ) kept the overnight call rate range unchanged, announced a reduction in the amount of its government bond purchases and indicated the possibility of a rate increase in July.
Closer home, the Reserve Bank of India’s (RBI) decision to keep the policy rate as well as the policy stance unchanged in June was on expected lines. We believe that the RBI could chart a monetary policy path different form the Fed and the Central Bank could be in a position to reduce the policy repo rate in 3QFY25. However, the rate cut cycle is expected to be shallow with cumulative rate cuts of 50-75 bps during this period.
India markets heaved a sigh of relief post the Cabinet formation as the same familiar faces reoccupied the top ministries. The Union Budget is likely to be presented in late July and with critical State elections due in the coming 6-18 months, the government is expected to increase focus on programs/initiatives towards alleviation of rural distress in the budget- a key factor which led to the ruling Party losing a third of its rural parliamentary seats in last month’s Central Government election. We expect the Government to utilize a significant amount of the large dividend (INR 2.1 lakh crore) proceeds from the Reserve Bank of India (RBI) towards supporting the above programs/schemes and anticipate the Government to keep the fiscal deficit target unchanged at 5.1% of GDP.
The long-awaited staggered inclusion of India sovereign bonds in the JP Morgan emerging market government bond index (GBI-EM) has begun from June. Local bonds are thus expected to attract long term passive demand over this year. India bonds have outperformed emerging market peers in the region, and with the current tailwinds, we expect them to continue to attract further demand from global investors. Such investors, who come with a different investment perspective and philosophy can further deepen the local bond markets and make them more vibrant.
Actively managed duration funds seem well suited to capitalize the current interest rate environment. The ITI Dynamic Bond Fund and ITI Banking & PSU Debt Fund can be looked as suitable investment products for investors with the commensurate risk/reward appetite.