Geopolitics took centre stage as the State of Israel declared war against Hamas – the Palestinian outfit which controlled the Gaza strip. The immediate fall out across the broader Middle East region has been largely contained, but a wider conflict can increase significant risks to major crude oil importing economies.
The FOMC expectedly held the key federal funds rate unchanged in 5.25% – 5.50% target range its November 2023 meeting, with Governor Powell stating that the Committee will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks. However, with the FOMC now “asking” – should we hike more - possibly indicates a status quo not only in the FOMC meeting in December 2023, but also possibly beyond.
The Bank of Japan (BoJ) maintained the Policy Balance Rate at -0.10% and maintained the 10-year Japanese Government Bond (JGB) yield target at about 0.00%. However, the Japanese Central Bank allowed greater flexibility in bond yields, saying it would regard the 1.00% upper bound for 10-year JGB yields as a "reference" in its market operations, as compared to it previously being viewed as a "fixed upper limit".
The Government of India (GOI) announced a decision to extend free food welfare scheme by 5 years. This extension of the welfare food plan is likely to cost more than INR 10 trillion over 5 years and increases risks of more such fiscal budget negative “initiatives” before the Central Government elections in Apr/May 2024.
We expect the RBI to keep the repo rate unchanged at the December 2023 MPC meeting and anticipate the Central Bank to have a small opportunity to cut the policy repo rate before the Union government elections in Apr/May 2024. Additionally, we expect the policy repo rate to end 2024 around 5.75% - 6.0% range.
Geopolitics and expectations of open market sales by the RBI led to the 10-year GOI bond trading higher in October 2023 as compared to the previous month. These concerns continue to remain; however, bond markets are also likely to draw comfort from supportive global data in the form of lesser than expected US government bond supply and soft US employment data. We expect geopolitics, global crude oil prices and global bond yield movements to drive the positioning of our duration portfolios.
Given that policy rates are at peak levels and are likely headed lower (bar any geopolitical flareup) over the coming quarters, investors may consider exploring actively managed duration products such as Dynamic Bond funds and Banking & PSU Debt funds. Such products seem suitably positioned to deliver superior risk adjusted returns as compared to non-market linked fixed rate products.