Within days of the announcement of the 21-day lockdown across the country, the central government and the central bank RBI have made some major announcements to cushion the impact of the economic crash. Based on estimates, the lockdown of the nature, we are going through, should shave off over Rs 2 lakh crore from GDP every week it is continued. In this week’s Finapolis Conversation, Kumar Shankar Roy speaks to Kumaresh Ramakrishnan, CIO (fixed income), PGIM India Mutual Fund, to understand how the debt markets are poised in the prevailing economic situation. The fixed income expert shares his view on the recently announced RBI package, the importance of fiscal stimulus over monetary stimulus and much more. Read to know.
The RBI has announced a whole set of monetary measures. What is your opinion on them?
RBI came out with a slew of well planned and targeted measures aimed at soothing the financial and credit markets and streamlining liquidity flow. The MPC met a week before schedule and took key measures including a 75 bps cut in repo (through a 4-2 majority decision), 90 bps cut in reverse repo, slashing the CRR by 100 bps and announcing targeted long-term repo operations (TLTRO) of Rs1 lakh crore for corporate bonds besides raising MSF liquidity lines for banks by an additional one per cent of their deposits. Cumulatively these measures should release Rs 3.75 lakh crore into the system which is already surplus with liquidity. These steps will lead to a decline in lending rates and declogging credit flow at least to the mid and higher rated entities for now. And also keep the money markets well lubricated.
Overall, a comprehensive package for now and coming on the back of government announcement, should help to tide over short term uncertainties.
You have mentioned that already the system has surplus liquidity. In this backdrop, what will the RBI announcements, meant to provide extra liquidity, achieve in terms of debt markets?
Higher liquidity in the ongoing kind of times is always welcome. The systemic surplus was roughly about Rs 2.5-3 lakh crore. During phases of disruptions, we see liquidity dislocations happening. This is why the CRR cut is really good because it releases significant amount of money. More, importantly the TLTRO will have a direct impact on the bond market. To mitigate the adverse effects on economic activity leading to pressures on cash flows across sectors, the Reserve Bank will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate, linked to the policy repo rate. Liquidity availed under the scheme by banks has to be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020. This is a segment of the market that was seeing serious dislocation in the last few weeks. With FPI outflows happening and not enough of domestic bidding happening in this segment, we had seen yields move up by 200-250 basis points. So with banks now coming in, we feel this segment will see a much-needed relief.
How has the debt market reacted to the RBI measures? How will things shape up in the long-term?
Post the announcement on Friday, the short end outperformed, with the money market rates down by over 200 bps while mid and longer end bonds are down by 125-150 bps. G-Secs reacted initially, but gave up gains on fears of expected expansion to the government balance sheet and ability of the market to absorb the incremental supply.
We have not seen any major reversal. Yields continue to remain reasonably lower (compared to Friday morning levels). Given that the RBI actions are very large in quantum, the trends will continue in our view.
There is a lot of interest on government securities. How are G-Secs looking?
The shorter end of G-Secs will definitely benefit due to the liquidity. In the longer-end, over time, will definitely see some impact because of the fiscal stimulus the government is coming out with. Particularly in FY21, because of the virus impact, we might see lower GDP, lower tax collections and so revenues of the government will certainly remain under pressure. Added to the fiscal stimulus, these would have to be met by increased borrowings. This will cause some pressure on the longer-end of the curve.
How sufficient are the relief packages announced by the Government and the RBI? We were already in a kind of a slowdown before coronavirus outbreak happened here...
I think in times like this, we will need a greater amount of fiscal stimulus than monetary stimulus. This is because monetary stimulus has its own limitations. Fiscal stimulus is something that will be more important in the medium to long term. To be fair, the RBI has dealt with many problems by announcing targeted measures. Going forward, we will need a bigger portion of help by way fiscal stimulus. It is important for the economy.
The government will have some more strain due to fiscal stimulus. The quantum of help required will be clear as we go along. We will need to see if the lockdown is over in 21 days, or is there a need for extension.
How have you positioned the debt portfolio in light of the developments? Any strategic tweaks?
On the duration side, we are very active. We keep altering the stance and the positioning over there. It depends on our market call. We think the shorter end and medium segment will do better than the long end. Although, from time to time, we will play the long end tactically depending on opportunities.
On the credit side, we have been any which way running higher quality names in the portfolio. This is on account of the stress, we have been witnessing in the market. In general also, our portfolio is invested in high quality names.
Apart from Gilt funds, all the other debt fund categories show high Yield To Maturity (YTM). What do you make of this? Is this a reflection of potential returns?
YTMs have risen recently. Yields went up due to financial dislocation. Post Friday’s action, yields will rally quite sharply. The returns from short term funds should be higher than the YTMs, because there will be capital gain kicker. But do remember that YTMs for portfolios may come down as yields start to come through into returns. With easy liquidity, most of the papers will start trading at a premium.