The RBI has reiterated its focus on system liquidity by announcing OMOs and Swaps. The report on effective mechanism for transmission of rates through external benchmarks will be out in mid-July. Some banks have already adopted T-bills as external benchmark. It needs to be seen how the banks transmit rates after 3 successive rate cuts from RBI.

RBI stated that its efforts are to accommodate growth concerns by supporting efforts to boost aggregate demand, and reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate. Given that headline inflation trajectory remains below the target mandated to the MPC, RBI has room to cut rates by another 25-50bps.

Domestic consumption has turned sour rapidly since Sep18, and the new government might need to announce measures through tax rationalization to give consumption a shot in the arm. This though would come at the cost of the fiscal deficit outlook. The front loading of Govt. borrowing program and tight liquidity will keep G-Sec yields elevated. Hence, avoid long duration funds.

On the other hand, supply of Corporate bonds has slowed post the IL&FS debacle. The wide valuation spreads over G-Secs and favourable demand supply dynamics should keep Corporate bonds attractive. Potential liquidity improvement efforts could help Short term bonds/funds positively. So, we expect further steepening of the yield curve conditional to further easing in liquidity deficit. Nevertheless, prefer good quality Low duration Funds and Ultra Short-Term Funds. Given the prevailing risk-reward trade-off, we continue to prefer high quality short duration funds and corporate bond funds over credit risk funds.