·         The geo-political Risk which was triggered due to Coronavirus in Wuhan has become the 6 sigma event as feared. The slowdown fears are quickly becoming a reality.

·         The falling commodity prices and bond rally globally will help keep Indian rates lower.  This is positive for trade deficit however due to equity selloff INR will remain under pressure, which is manageable as RBI has enough reserves to fight the same.

·         If India continues to remain relatively unaffected from the COVID-19, it could spell positive for the country in attracting capital, tourism and jobs.

·         We believe we have seen peak of inflation in February  2020 with head line CPI at 7.59% . However based on current prices we expect the same to ease off to 7% and gradually trend towards the comfort zone. This will be positive from interest rates point of view given the overall environment inflation is what will be chased globally

·         The RBI announced LTRO worth 1lac cr which was much potent tool than a rate cut and we believe this LTRO will pull down and anchor the short term rates much closer to overnight rates as 1 Lac cr of fresh money will lead to at least 2-3 lac cr worth of demand for assets leading to spread compression.

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

·         The Budget presented a policy continuum, with focus on fiscal prudence and some steps in capital markets, especially to help India Inc access global financial markets.

·         The last 18 months have seen risks emerge from wholesale funded NBFC, over-leveraged promoters having difficulty to roll-over debt etc. Over the few months, lot of these companies have managed to raise capital which is an encouraging development. With RBI introducing newer measures to help in transmission of interest rates, this fall in borrowing costs to India Inc will be viewed positively by markets.

·         Coronavirus – while initial impact was localised to Chinese economy and therefore the supply shock given large export from China, the spread of virus globally now risks creating a demand shock as well. While global coordination of policy makers and containment of virus and improvement in drugs to counter will reduce the longer term impacts of this shock, near-term will be dominated how the virus stats develops, especially in developed world.

·         While near term uncertainty induces volatility in asset prices, in the long run, wealth creation in equities is a function as how businesses can profitably grow over their cost of capital sustainably. Given the long-range of reforms introduced, we believe longer-term prospects of Indian equities is quite encouraging and we would advise investors to benefit from such induced volatility.

·         Time in the market is more important than timing the market - recently, markets volatility has moved up and investors can benefit from this volatility by focusing on disciplined investing and asset allocation.

Debt Outlook:

• We believe we have seen peak of inflation in January 2020 with head line CPI at 7.35% . However based on current prices we expect the same to ease of to 7% and gradually trend towards the comfort zone. This will be positive from interest rates point of view
• The government admitted to a fiscal slippage and pegged the Fiscal Deficit at 3.8% for FY20. But it stuck to the glide path the next year has been pegged the Fiscal deficit at 3.5%. 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.
• The geo-political Risk has moved from US-Iran to china WRT to Wuhan – Coronavirus. 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 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.
• As we said earlier, 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 6m. 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 AAA/PSU followed by NBFC/HFC like Bajaj/HDFC; and then, it may percolate to lower grade NBFC and other corporate bonds.
• 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.