Even as the investors may be on the lookout to invest in debt mutual funds, HDFC Securities says that investors should shift to accrual short term and ultra short term funds, as yields might stay elevated in the near term.
Even as the investors may be on the lookout to invest in debt mutual funds, HDFC Securities says that investors should shift to accrual short term and ultra short term funds, as yields might stay elevated in the near term. “The debt market has been battered and bruised during the past 6 months owing to sharp rise in the benchmark yields. Debt funds adopting high duration strategies have suffered the most although the impact is clearly visible across other categories as well. The 2018-19 Budget did little to alleviate the fears of the debt investors,” HDFC Securities observed in its report.
The debt market is also reacting negatively, after the government failed to meet its fiscal defict target. “The government exceeded its fiscal deficit target for FY18 of 3.2% by 30bps to reach 3.5% of the GDP. It has estimated the deficit for FY19 at 3.3%, which is higher than the 3% target set in the previous Budget. This 3% target, which was postponed by a year during the previous Budget already, has now been pushed to FY2021. The debt market perceives this as a negative,” HDFC Securities observed.
Apart from these factors, the debt market will also react to rising crude oil prices, and the government’s revenues from GST. The estimated increase in indirect tax revenues by 19% might be difficult to achieve given the disruptions in the GST still smoothening out and new provisions waiting to be implemented (like the E-way bills), says the firm.
Further, the fuel subsidy has been maintained at Rs 25,000 crore despite crude oil prices rising from sub-$50 per barrel to $70 per barrel. “Lastly, the outlay for the National Health Protection Scheme has not yet been disclosed, the effect of which on the deficit remains uncertain. In addition to this, higher rural spending in the pre-election year might add to inflationary pressures,” the firm said.