Why is it time to give your portfolio a fixed income boost?
High interest rates, an invitation: After a hike of 250 basis points over 2022-23, and as both wholesale and consumer inflation seem to be under control now, the RBI has paused rate hikes leaving the repo rates at 6.5%. The RBI last hiked the repo rate in February 2023. In June 2022, the 10-year g-sec hit a closing high of 7.55%, before tapering off.
Barring a brief spike in March 2023 due to the Silicon Valley Bank trouble, the Indian 10-year g-sec has stayed in the 7.1-7.4% yield band. As RBI stays hawkish on inflation and is focused on removing any excess liquidity from the system, rates don’t seem likely to come down any time soon. Since interest rates and yields have peaked out, it may be a good time to lock into high accrual income by holding bonds till maturity.
Also from a risk-reward perspective, adding higher duration to the portfolio looks like an attractive strategy as investors could gain from future rate cuts and can ride down the yield curve. JP Morgan Bond Inclusion: Indian Government Bonds (IGBs) will be added to JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) index. The addition will start from June 2024 and continue till March 2025.
The weightage in the index will start at 1% in June 2024 and will increase by 1 percentage point every month till March 2025. At the end of these 10 months, IGBs will have a 10% weight in the bond index. A mere 10% weight in the JP Morgan bond index would result in inflows of about $20-30 billion.
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