Lakshmi Iyer
From "Kya kare kya na kare yeh kaisi mushkil hai" mode, the MPC members have finally decided to get into a "Nahi Nahi abhi nahi..abhi karo intezaar" mode.
On August 6, the Monetary Policy Committee (MPC) unanimously voted for a status quo on benchmark rates.
There were divergent market views this time and also many permutations envisaged even if there were to be a status quo. But the central banker has suggested to all the "bekaraar" investors to wait out for now.
While there wasn’t any rate action, the MPC announced a slew of other measures. Firstly, the additional standing liquidity facility (ASLF) of Rs 5,000 crore each to NHB and NABARD for supporting HFCs and smaller NBFCs/MFIs was announced.
This is over and above the Rs 10,000 crore and Rs 25,000 crore already provided and bodes well from a liquidity availability perspective.
Additionally, the RBI has allowed finance companies (banks and NBFCs) to carry out one-time restructuring for corporate and personal loans without downgrading asset classification to NPL provided these are SMA-0 accounts (i.e. less than 30 days overdue).
These measures cap the upside risks to slippages for financials. Slippages, however, could still remain high for the sector. A similar kind of restructuring was also made available for MSME borrowers facing stress on account of the economic fallout of the pandemic.
While we saw equity markets cheer these moves, it was a tad tepid reaction from bond market participants. Does this mean that the rate easing cycle is over? Not really.
We believe that the scope for easing remains as inflation comes down towards the end of the year. This has been the primary consideration for RBI to be on hold.
Q1 FY21 has seen a good inning for the fixed income overall and a small breather to that doesn’t in anyway puncture the momentum. We have seen corporate bonds outperform government bonds since the last rate cut in May.
The trend is likely to continue in our view. Also, a case to own selective non AAA bonds maintaining the high-grade nature of underlying can be made as the slow economic pickup is visible, bolstering the case.
The current yield curve is too steep – 1-year government bond at sub 3.5% levels and 10-14 year at 6-6.15% levels which makes a strong case for Operation Twist (OT) to make a comeback.
The comfortable liquidity in the banking system is set to continue as we do not have a full resolution on the medical front. This would provide the much-needed anchor to the short end of the yield curve as well.
Foreign Portfolio Investors (FPIs) continue to be net sellers in India bonds in 6 out of 7 months so far in CY20! The quantum of selling is however receding.It may be a good idea for FPIs to consider some allocation to Indian Fixed income given relatively high carry and a stable currency. Note that India Forex reserves are almost at $535 bn which could offer support to INR when needed.
The rate easing story has reached its interval stage – the movie is yet to be completed though.
We would urge investors to use an uptick in yields as allocation opportunities to fixed income funds across spectrum. Given the high steepness in the yield curve, case to wean out of overnight and liquid category remains even now
(The author is Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company)
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