A key element we need to understand regarding the fixed income market is–we are nearing the peak interest rates in the economy. Let us understand this in a systematic way:
Peaking of interest rates
The Covid-19 pandemic changed the investment landscape a lot in a brief period of time. The Reserve Bank of India (RBI) cut the repo rate by 140 basis points between February and May 2020 to stimulate the economy. These cuts pulled down bond yields. Interest rates remained unattractive. Thereafter, supply side bottlenecks aggravated by geopolitical issues resulted in inflationary pressures across the globe. Central banks across the globe focused on reining-in inflation. Inflation shot higher than the upward acceptable limit of 6%. To deal with this, the RBI increased repo rate by 250 basis points over a period of time.
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