Fixed Income Outlook: Time To Accumulate

In view of the abrupt failure of two regional banks in the US along with turmoil in a large European bank, addressing financial stability risks is likely to become a priority (rather than just focus on inflation) and a key determinant of future monetary policy actions for global central banks, HDFC AMC has said in a report.

According to the research report by HDFC AMC, first and foremost, there seems to be very limited risk of similar event happening in India considering the stringent regulations around liquidity coverage ratio, HTM investment proportion and capital adequacy requirement. Further, Indian banking system has gone through a multiyear cleanup exercise prior to the pandemic and the current balance sheets are in significantly healthy shape with overall Net NPA at 1.3% and capital adequacy 16% as of 30 September 2022.

Implication and Outlook for Indian Fixed Income Market

According to HDFC AMC, there seems to be very limited risk of similar event happening in India considering the stringent regulations around liquidity coverage ratio, HTM investment proportion and capital adequacy requirement. "Further, Indian banking system has gone through a multiyear cleanup exercise prior to the pandemic and the current balance sheets are in significantly healthy shape with overall Net NPA at 1.3% and Capital adequacy 16% as of 30 September 2022," HDFC AMC has said in a report.

According to the asset management company, the MPC is likely to consider these developments and risks when they meet in April 2023. "To recall, RBI has already done effective tightening of over 300 bps by raising repo rate by 250 bps and draining out surplus liquidity. Also, there are no signs of overheating in domestic economy despite resilient growth. Thus, in a highly uncertain global environment there is a strong case for RBI to pause the rate hiking and wait till June 2023 to decide upon future course of action. Notably, by that time, there will be more clarity on progress of monsoon, impact of already done rate hikes, direction of US Fed and impact of aforesaid events on global growth and inflation," the AMC has said.