With higher uncertainty in debt and equity markets, this would be the time to review asset allocation and manage risk. There is now an opportunity to construct a layered debt portfolio. A phased transition out of ultrashort-term funds into high-quality accrual funds may be warranted.
This policy indicates that the RBI has greater visibility into inflation and growth projections and are comfortable with the current stance and policy rates. While near-term inflation is on the higher side, the central bank expects inflation pressures to stabilize in the coming financial year. Rising crude and commodity prices will continue to push inflation upwards, but a normal monsoon and controlled food supply will moderate this effect. Further, oil prices have moved both ways in the recent past, making it difficult to be certain that they will remain at elevated levels.
The reserve bank has continuously cautioned against fiscal slippages. Last year, farm loan waivers were a concern. This year, it is the government’s fiscal deficit target. Fiscal slippages increase inflation and lower creditworthiness and will have a bearing on capital flows.
Across the world, bond markets are correcting. Advanced economies are witnessing higher yields now. For instance, the yield on the 10 Year US Treasury is trading close to 3%. A weaker dollar has caused oil and commodity prices to rise, increasing domestic inflation. All these global factors have contributed to the rise in domestic yields.