The Hindu Business Line : Market View

The Fixed Income market is set for some interesting times ahead. Interest rates have been on a rising path for the lost 3 years and look set to soften from the current levels. Bond prices move inversely to interest rates, hence a fall in interest rates is good news for bonds.

The current move has been a result of the confluence of a few positive factors.

Inflation rates are the key factor driving interest rates lower. The strong economic growth in the economy seen since 2003 has led to strong demand growth. In the absence of rapid industrial capacity growth, the increased demand pushed up price levels. Liquidity inflows, due to FII investments as well as domestic corporates borrowing abroad, added to the rise in prices. The driven price rises were most evident in the equity and property markets. The RBI and the Government mode concerted efforts to bring the price pressures under control and these efforts are now bearing fruit.

The post interest rate hikes have considerably dampened the demand pressure, with the auto sector bearing the maximum brunt. The real estate prices growth has been subdued of late. The curbs on external borrowings have pushed up the borrowing costs for corporates. On a broader perspective, there has been a distinct slowdown in the sales growth for the corporate sector over the lost two quarters.

With its objectives of maintaining price stability nearing success, the RBI can afford to relax its grip on the interest rates. The global factors too support an easing of rates. The global interest rate scenario is benign, as the large economies are staring at a possible recession. The US Fed has already cut rates by 1 per cent from their last peaks and is expected to cut rates further in the course of the year.

The main risk foreseen by the RBI is the possibility of high energy prices seeping into the general price levels. The Government is considering a hike in the domestic retail fuels prices. However in the face of subdued growth, the pricing power of the corporates is for lower.

In a falling interest rate scenario, the returns from bonds that are more sensitive to interest rate changes are higher. It looks like the time for more aggressive positions in the Fixed Income space is at hand.

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