As a general trend, when the economy performs well and is expected to witness brisk growth, equity markets overperform and similarly the broader bond market does perform well with good bond yield as the demand for money is high in such a scenario. Nonetheless, in the other case, when the economy is weak, the demand for money is lower and hence bond yield is pushed downwards with lower interest rates.
But as of now, the bond market outlook in the Indian context goes against this convention.
The equity market is at its all-time high, Sensex has attained the levels of 32,000 while Nifty-50 index has crossed the 9800 mark. At the same time bond yields are easing to 6.46% for 10-year benchmark. But the situation has however two facets, wherein if the economy is performing good, government may not be pushed to lower rate cuts down and give a boost to interest rates.
Nonetheless, amid a scenario, when the inflation rate both CPI and WPI have recorded lowest levels in the month of June, the scope for further rate cuts by the Ministry has come into picture.
So, with a further scope of rate cut in the economy, despite being to a limited extent, the bond yields are to be on a lower end in the Indian market.
What should be investors take on the bond market performance?
The investor category should remain resilient and for their equity exposure either bet through the mutual fund route or take the help of financial advisers at best. Further, no concern should be placed for the recent demonetization wake defueled the economy, as the effect is only short-lasting. Probably, India is the fastest growing economy.
The current reported levels shall continue to support the bond market, so you can bet on short-term bond funds instead of long horizon bonds.