Indian bonds remain attractive amid stable macro-economic variables: PGIM India

New Delhi [India], October 21 : Indian bond markets continue to demonstrate resilience, supported by stable macroeconomic fundamentals and favourable demand-supply dynamics, as per Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund.
Pal anticipates a gradual approach by the Fed to rate reductions. He argues that Indian bonds remain a lucrative investment option due to the country's robust underlying economic factors, including high real interest rates, which create room for potential rate cuts.
The recent rate cut in the US increases the probability of similar actions by the Reserve Bank of India (RBI) in the near future.
Bond yields generally move ahead of rate changes, making it a strategic time for investors to enhance their fixed-income allocations during yield upticks.
PGIM India expects the benchmark 10-year bond yield to decline towards 6.50 per cent by Q4 2025, with long bond yields projected to drift lower in the coming quarters.
For medium to long-term investors, Dynamic Bond Funds with a duration of 6-7 years and a focus on sovereign holdings present a compelling risk-reward scenario, while Money Market Funds are suggested for investors with a 6-12 month horizon.
The Indian bond market remained steady last week despite geopolitical tensions in the Middle East, with traders capitalizing on profit opportunities.
The benchmark 10-year bond yield closed at 6.79 per cent, unchanged from the previous week, as crude oil prices dropped nearly 7 per cent.
Hopes for an imminent RBI rate cut have dimmed, especially after the central bank's governor described such a move as premature and risky, emphasizing optimism on growth and the resilience of the economy.
Inflation remains a concern, as the Consumer Price Index (CPI) rose to a nine-month high of 5.49 per cent, driven by increases in food prices, especially vegetables, edible oils, and pulses, surpassing market expectations of 5.10 per cent.
Meanwhile, Wholesale Price Index (WPI) inflation was slightly below expectations at 1.84 per cent. On a positive note, the trade deficit narrowed to USD 20.80 billion in September from USD 29.70 billion in August, thanks to a decline in non-oil imports.
Additional data showed that India's taxpayer base has grown significantly, with an 82 per cent increase to 10.40 crore taxpayers from FY15 to FY24.
Direct tax collections in FY24 reached Rs 19.6 lakh crore, up 182 per cent from nearly Rs 7 lakh crore in FY15. Notably, personal income tax collections surpassed corporate tax collections for the second consecutive year.
The government also approved an average Minimum Support Price (MSP) hike of 4.90 per cent for Rabi crops, with barley seeing the highest increase of 7 per cent. The hike aligns with last year's trend and is not expected to add significant pressure on food inflation.
Amid concerns over private credit risks, the RBI banned four Non-Banking Financial Companies (NBFCs) from new loan sanctions, underscoring the central bank's commitment to macro-economic stability.
The Indian Rupee (INR) remained under pressure due to Foreign Portfolio Investor (FPI) outflows from the equity market, but RBI interventions helped keep it stable at 84.07 against the U.S. dollar. FPI outflows from equities have exceeded USD 9 billion this month, while FPI debt inflows remained flat.
The money market saw slight pressure, with three-month Certificate of Deposit (CD) yields rising by 3-4 basis points, even as interbank liquidity remained comfortable.
The ongoing cautious sentiment in the bond market and evolving global economic conditions suggest a dynamic outlook for investors.