The purpose of monetary policy is to manage inflation, facilitate growth, and regulate credit in the economy. The RBI’s Monetary Policy Committee (MPC) has a clear mandate to target inflation and maintain it around 4%.

In terms of bond markets, 2017 and 2018 are like chalk and cheese. 2017 witnessed the after-effects of demonetization. Excess liquidity needed to be neutralized, India’s growth prospects required attention, and inflation was persistently low partially supported by low oil prices. The markets expected the RBI to cut interest rates to boost the economy. By contrast, 2018 records almost neutral liquidity, volatility in the inflation prints, and elevated oil prices. This time around, the market anticipates rate hikes. Yet, the RBI has chosen to maintain the same neutral stance through both years.

Bond yields have moved almost 1.5% from corresponding levels last year. A rise in yields indicates a reduced appetite for bonds. This can be attributed to geopolitical tensions, increase in interest rates in advanced economies like the US, higher oil prices, increased supply of government bond, and expectations of rate hikes. The RBI has raised interest rates twice already this year. We could expect further rate hikes on the back of a higher MSP, increased government spending, higher fiscal deficits, and elevated oil prices.

Now is the time to lock into debt. Bond yields are attractive. Following a sensible asset allocation strategy can help diversify risk and bring balance to an investment portfolio. Constructing a layered debt portfolio requires preparation. The debt market could witness continued volatility, but volatility is an investment opportunity. Prepare now for the chances that come your way.

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