Axis Mutual Fund advises bond investors to gradually add duration exposure despite challenging macro conditions, as reported by Business Standard. The fund house recommends investors buy fixed income assets but gradually, suggesting markets appear excessively pessimistic in the near-term. According to Axis MF, if the Reserve Bank of India (RBI) opts for a pause after measured tightening, avoids emergency liquidity tightening or signals growth support, bond yields could rally in near-term by 20-25 basis points. Investors may consider measured addition to duration exposure under three conditions: RBI avoids panic tightening, crude prices stabilise, and policymakers introduce measures to attract dollar inflows.
India's structural dependence on imported energy creates significant vulnerability to oil price volatility. As reported by Business Standard, India imports nearly 85% of its crude requirement, making the economy highly sensitive to oil shocks. According to Axis MF estimates, every $10 increase in crude prices can widen the current account deficit (CAD) by around 40-45 basis points of the gross domestic product (GDP), lift inflation by 45-60 basis points, and increase fiscal pressure if fuel taxes are cut to absorb the shock. The ongoing Middle East conflict and sustained rise in crude prices beyond RBI's assumptions is creating simultaneous pressure on inflation, the rupee, growth and fiscal balances.
According to Business Standard, Axis MF notes that unlike earlier cycles, India entered this phase from a position of relative strength, supported by lower private leverage, healthier banks, stronger foreign exchange reserves, improved fiscal credibility, global bond index inclusion, and deeper domestic financial savings. The fund house believes markets may be overestimating the extent of tightening, with overnight indexed swap (OIS) markets pricing nearly 75-100 basis points of rate hikes and government securities carrying elevated term premiums. However, Axis MF's base case is that RBI is unlikely to respond to rupee weakness with a 2013-style aggressive rate-hike cycle, instead adopting a broader policy toolkit combining measured rate actions of around 25-75 basis points, liquidity management, foreign exchange intervention, and administrative measures aimed at attracting dollar flows.
As reported by Business Standard, Axis MF expects RBI could adopt a broader policy toolkit combining measured rate actions of around 25-75 basis points, liquidity management, foreign exchange intervention, and administrative measures aimed at attracting dollar flows. These measures could include NRI deposit incentives, sovereign-style dollar mobilisation programmes and overseas issuance by lenders and public sector entities. The fund house cautions that sharp tightening alone may not solve the current challenge, noting that INR depreciation cannot be solved purely via rate hikes as aggressive hikes may damage growth trajectory for India as oil shock is supply-side, not demand-side. During previous episodes like the 2013 'Taper Tantrum' and 2018 oil spike, rupee stability emerged only after RBI introduced targeted measures rather than through liquidity tightening alone.
According to Business Standard, Axis MF suggests investors maintain neutral-to-slightly long duration in the next three months, add duration after the first RBI action over three to six months, and extend portfolio duration further over six to twelve months if crude falls below $75 or long bond yields move above 7.9%. The fund house warns that India may be transitioning away from a 'Goldilocks macro' phase of low oil, benign inflation and stable deficits, as elevated crude (above $90), rising fiscal risks, potential continuity of INR weakness, and persistent imported inflation may keep macro risks alive. While the near-term view is tactically positive on duration, structural duration conviction remains moderate, with Axis MF cautioning against becoming aggressively long duration given the evolving macro environment.
