Sectoral Equity Indices & Market Analysis

Classification - Restricted Fixed Income Outlook ■ Liquidity is likely to remain under pressure going forward given the rising credit growth and G-secs supply pressure. Also, RBI's Forex interventions are likely to continue in the near term to smoothen Rupee volatility, which could to be another factor leading to lower liquidity surplus. We may see liquidity moving in a range between the deficit and surplus levels with the RBI stepping in on either side as and when the need so arises. With unseasonal rains having impacted crops and festival season demand, food inflation is likely to remain elevated in the near term. Low base effect of last year even in October 2022, is another pressure point for the next inflation print. The recent rise in commodity prices if sustained could also add to the inflationary pressures. Additionally, the depreciation in the INR could also add to the overall inflation through imported inflation. Thus, in the near term we expect inflating to remain above the RBI's flexible inflation target of 2%-6%. ■India's Current Account (CAD) deficit is likely to widen, leading to implications on Rupee exchange rate and thereby pries of imported items. Here the Balance of Payments' situation and RBI's Forex management will be critical. Thus, currently a host of variables both global and domestic are imparting uncertainty to the inflation trajectory. Going forward, the RBI is likely to continue with the monetary policy tightening unless it sees a structural decline in domestic inflation. Given the fact that even the US Fed is likely to continue monetary policy tightening, other nations grappling with high inflation albeit with relatively better growth rates could also adopt a similar approach to tame the current unbridled inflation. The supply of government bonds continues to remain elevated, which is likely put upward pressure on G-sec yields. That being said so far the demand-supply have remained balanced with the weekly G-sec auctions seeing strong demand. So far, the RBI does not seem to be in favour of conducting OMO purchases despite the liquidity tightness. In terms of fiscal deficit, while the tax collections have been strong, should the government need to take further measures for ensuring macro-economic stability amidst global uncertainty, it may have implications on its revenues. ■ Despite of growth slowdown and possibility to further impact on economic growth due to tight monetary policies, major global central banks have shown strong intent of decisively bringing the elevated inflation down to their respective target range. For this, further rate hikes are being talked about by the policy makers. Thus, the trajectory of yields and yield curves is likely to be determined by the growth-inflation dynamics, commodity prices, energy prices (including food prices) and currency exchange rate going forward. ■ Domestically, flattening of the yield curve is likely to continue given the interest rate hikes by RBI and tightening liquidity conditions. The markets are pricing in a terminal Repo rate in the range of 6.25%- 6.50%. Thus, currently, there is a lot of uncertainty surrounding the global as well as domestic economies, leading to volatility in capital markets. Given the expected volatility and uncertainty and expectations of flattening of the yield curve, staying invested at the short and the very short end of the yield could be better from risk reward perspective currently. ■ Thus, investors should look at funds oriented towards the shorter end of the yield curve for relative stability in the near term and to benefit from the reset in interest rates on the higher side. For this one can look at Short Duration Funds, Money Market Funds, Ultra Short Duration and Low Duration Funds for a horizon of 12 months and above. For investors looking for accrual strategies, they can consider Target Maturity Index Funds that invest in a mix of better quality bonds with investment horizons matching the maturity of the funds. Investors who are comfortable with volatility and have a longer investment horizon could look at Dynamic Bonds for a horizon of 24 months and above. For a horizon of 3 months and above Arbitrage and Money Market Funds can be considered. Whereas, for a horizon of up to 3 months investors can consider Overnight Funds and Liquid Funds. Investors should invest in line with their risk profile and product suitability. 36 Confidential/Restricted HDFC BANK RESEARCH HDFC BANK We understand your world Classification - Restricted

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