Wrap up of debt market in 2020
The year started on a negative note due to covid related disruptions with FII withdrawing money from both equity and debt markets. RBI cut rates by 115 basis points on the repo and 155 basis points on reverse repo, it released liquidity by cutting CRR by 100 basis points injecting Rs.1.40 lakh crore in the system. To get over the rise aversion of Yes Bank tier 1 default and uncertainty created due to covid lockdown, RBI infused Rs.2.50 lakh crore of liquidity to banks which had to be lent to corporates/NBFC/HFC.
RBI priorities are economic growth and jobs over CPI inflation. CPI inflation for the current year has been above the RBI tolerable band of 6% till October 2020.
India went into a strict lockdown, which effected the revenue projections of the government. The government also announced relief and stimulus package along with various RBI measures. The central government increased its borrowing programme from Rs.6 lakh crore to Rs.13.10 lakh crore. The state borrowing programme also increased to Rs.10 lakh crore. To ensure the smooth borrowing programme, RBI has been doing Open Market Operations. RBI has bought Rs.3.06 lakh crore of government securities to keep the 10-year government bond yields below 6% levels and it is buying state government bonds to support the markets.
The short end rates have fallen by 200 to 250 basis points in the current financial year and the long end yields have fallen by 50 basis points. The spread between G sec and corporate bonds have narrowed to 20 to 40 basis points up to the 5-year segment. This was 150 to 200 basis points prevailing during the risk aversion phrase of covid 19.
Currently, there is a lot of liquidity in the debt market as many investors have invested in fixed income funds post market rally. Will the trend sustain? Your views
Liquidity is created due to RBI intervention in the forex markets, RBI has bought 67 billion USD in the current financial year on a net basis; it has also cut CRR by 100 basis points releasing Rs.1.40 lakh crore of liquidity in the system. Fixed income funds have received around Rs.2.5 lakh crore predominantly in schemes running high quality portfolios. There has been outflows from credit funds in the current year.
Given the uptick in commodity cycle and improving growth prospects of the Indian and global economy, CPI inflation is expected to be above 4% levels for the next year also. As RBI has stated, growth continues to remain weak necessitating accommodative monetary policy for current year and the next financial year. Scope for rate cuts is limited and returns in debt schemes are expected to be around the running yield of their respective portfolios.
However, given low growth expectations in the coming years, inflows in debt schemes are expected to remain robust but may not match the inflows that we saw last calendar year.
Your outlook for 2021
We have a commodity upswing cycle due to easy liquidity globally. However, food prices are expected to be under control next year due to good sowing in kharif and rabi crops in India. This should keep CPI inflation under control. India is also expected to receive global flows in debt next year as emerging markets currency is expected to strengthen due to loose fiscal policy in advanced economies. The President elect of US is already calling for another round of stimulus next year. We should see global and Indian economy flooded with liquidity next year also. Rates on the shorter end is expected to be close to the operating rates and debt markets are expected to be range bound. The long end of the yield will depend on the borrowing programme of the central and state government in the next financial year. RBI is expected to do OMO to support the central and state government borrowing programme as it does not want any disruption in the nascent growth recovery.
Which category of funds should MFDs recommend at this juncture?
Given the expectation of no rate cuts in the next year and RBI accommodative monetary policy stance for the current and next financial year, it is advisable for investors to stick to funds, which have accruals as the main source of income. The credit quality of the portfolio should be good as the stronger companies are growing at the expense of weaker companies. This could lead to higher downgrade or default risks in the coming years. We recommend good quality short term bond funds, banking and PSU funds for investors having a 6 months plus investment horizon. For investors having a time horizon of less than one month, we recommend investors to invest in ultra-short term bond fund, 1 to 3 months in money market funds, 3 to 6 months to invest in treasury advantage fund.
