Inflation likely to ease towards 4 pc: Kotak MF

"We believe we have seen peak of inflation in January 2020 with head line CPI at 7.35 per cent. However, based on current prices we expect the same to ease off to 7 per cent and gradually trend towards the comfort zone", the Fund said.

Long-term Repo Operations announced by the RBI will push the short-term rates down and eventually lower the longer-end of the curve too. There will be an immediate transmission in the sovereign assets, which will lead to a chase in the corporate bonds lowering the corporate bond yields too.

The comfort level of inflation is four per cent (+,-) as per the RBI mandate.

The government admitted to a fiscal slippage and pegged the Fiscal Deficit at 3.8 per cent for FY20. But it stuck to the glide path and the next year has been pegged the Fiscal deficit at 3.5 per cent. To its credit, the government did not increase the market borrowing for the current year and next year borrowing program was also as per market expectations.

"We will have to see how soon India will be a part of Global Bond Index for further direction", it said.

The geo-political risk has moved from the US-Iran to China with respect to Wuhan- coronavirus issue. As of now the risk of a global slowdown is increasing, i.e, positive for interest rates.

Global risk-off led to bond yields falling sharply in the US Treasuries. The yields of other developed economies also continue to remain low. This may, sooner than later, lead to chase for Indian sovereign assets which are still offering high real rates, Kotak said.

India is probably preparing for inclusion in Global EM bond indices. The Union Budget has paved the way for the same and hopefully this may see the light of the day by end of the year. This will be a huge positive for long bonds. Liquidity is in huge surplus mode but market is yet to price this new phase. Positive liquidity is a more important tool than repo rate cut.

"We maintain that due to 'operation twist' the rate cut cycle has been elongated  by at least six month. We expect at least 25-50 bps cut in the policy rates in CY20. Market may still be in denial mode which gives a window of opportunity for the long term investors.

"In a nut shell, key driver for returns will be corporate spread-compression or flattening of the yield curve. It will start with the AAA/PSU followed by the NBFC/HFC like Bajaj/HDFC, and then, it may percolate to lower grade NBFC and other corporate bonds," the report pointed.

"We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is  still present and becoming more attractive. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon", it said.