The strong bounce back in the global economy has slowed during the last quarter or so, as the effects of the fiscal stimulus started to fade and inflationary pressures started to build up. However, due to the differential economic growth rates, we have witnessed monetary tightening in the emerging markets space, while the developed world continues to have an accommodative monetary policy.
In India, the strong economic growth, along with the rising inflationary pressures, has prompted the RBI to become one of the first central banks across the globe to increase interest rates. The central bank, in the recent annual policy announcement, accelerated the tightening pace. While the larger increase in rates and continued anti-inflationary stance have exerted relatively more upward pressure on the shorter end of the yield curve, we believe this segment is relatively attractive to the longer end of the curve. The latter is more susceptible to government borrowings, oil price movements and their impact on India's twin deficits.
INTEREST RATE CYCLES AND FIXED INCOME MARKETS
During an interest rate cycle, prices of fixed income securities behave differently based on various factors, but longer-maturity securities are typically considered to be relatively more sensitive to interest rate risk. Generally, assuming other factors are the same, the price of a 10-year security will move down more compared with a one-year security during monetary tightening.
STRATEGIES
Experience over the previous interest rate cycles in India and across the globe indicates that during a rising interest rate environment one should focus on shorter maturities, corporate bonds and accruals. Historically, corporate bonds have performed well during monetary tightening phases.
Source: www.economictimes.com
Ravi Jhawar
Summer Intern-Technical Analyst
DENIP Consultants Pvt. Ltd.
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