Financial markets in India are witnessing sharp volatility currently as a result of the fallout in global markets, following the rapid spread of the Corona virus and its consequent economic impact. Ironically, this comes at a time when the India Debt Markets were already grappling with the multiple credit events.
In such volatile markets, speculative bets are closed and cash is raised in ‘safe heaven’ assets such as fixed income instruments. Since the outbreak of Corona Virus around late February this month, bond market has rallied with 10 year G sec sharply rallying making a 11 year low of 5.99% as on 9th Mar 2020.Further, with overseas investors (FPIs) flying to the safety of dollar backed assets from emerging market debt in last 10days, yield curve across 3month to10 year point have gone higher by 75-150bps from lows of early March 2020.
Even as we witness the disruption, the following key indicators provide us a strong reason to believe that bond prices will rise as this current market event comes to an end:
CPI inflation eased to 6.58% (from 7.59% in previous month) and is expected to project further downward
Crude prices have fallen sharply – trading less than US$ 30 per barrel
Systemic liquidity continues to remain in surplus – around Rs 3 lakh cr
RBI support in terms ‘whatever it takes’ to support growth.
What is the outlook and way forward?
Sharp decline in growth & inflation (in the range of 3%-4%) expected over next 3-6 months
Policy makers to act aggressively – steps to soothe markets and the prevailing fear in short term an aid economy over medium term
RBI is likely to ease policy rates as a counter cyclical measure in line with other global central bankers (To alleviate the liquidity concerns, injection Rs 1 lakh crore via long term repo operations (LTRO) in various tranches and maturity. To address the US dollar liquidity, the RBI also announced additional US$2 billion forex swaps)
With likely policy actions on monetary side and affirmative action by RBI to support financial stability we understand exposure to short – Medium duration and AAA centric funds will optimise for investors
Potential opportunities in Debt Markets:
Short end, 2-3 year AAA rated bonds to ease substantially, below 6% levels in next 2-3m (from 7.5% today). Gilt sub 6% levels. Corporate bonds likely to outperform
Advise to focus on 2-5 year PSU corporate bonds. Funds like Corporate Bond Fund and Banking & PSU Debt Fund best placed to benefit
India is still passing through the credit crisis. Avoid incremental investment in credit risk
Advise to our Investors:
Stay invested – as current losses are likely to unwind as policy-makers respond to the situation. Avoid panic induced exit!
Fresh investments – Should look at investing in these opportune levels in high quality portfolios from a 6 month to 3 yr perspective
Short to medium duration products – Money Manager Fund, Savings Fund, Low Duration Fund, Corporate Bond Fund, Banking & PSU Debt Fund
With rate cuts likely, the yield compression potential remains. Current high yields provide an attractive carry for the investor!
Disclaimer: All the views in the blog are personal of the author not attributing to anyone.
