Rate cuts may begin in Q3 CY24, increase allocation to Fixed Income: PGIM India MF

financialexpress.com:

As the global monetary tightening comes to an end with the US Fed’s pivot, we are in for a long pause in the rate cycle at least for the next two quarters.

RBI will also be on a long pause and though we expect rate cuts only in the Q3 next calendar year, bond yields tend to move in advance of rate action and, thus, “we believe that with the rate cutting cycle on the horizon, investors can look to increase allocation to Fixed Income,” says Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

Pal suggests that investors with medium to long term investment horizon can look at funds having duration of 3-4 years with predominant sovereign holdings as they offer a better risk reward currently. Investors having an investment horizon of 6-12 months can consider Money Market Funds as yields are pretty attractive in the 1year segment of the curve.

Dynamic Bond Funds and Gilt Funds are also likely to do well with fall in long end bond yields in anticipation of rate cutting cycle starting next year. We expect the benchmark 10 year bond yields to continue to fall and come down below 7% over the next couple of months.

Also Read: Short Term FD vs Long Term FD: 5 tips for selecting the right fixed deposit tenure

Bond yields were stable in the last week of the year with the 10 year benchmark bond yield ending the week and the year at 7.18%. Money market yields came off towards the end of the week though the overnight lending rates stayed elevated close to the MSF rate. The current liquidity tightness in the banking system is due to the very high level of government surplus, which in our estimate is running close to Rs 4 lakh crore.

“We expect government spending to pick up as we go into the final 3 months of FY24. As the government