Rajkumar Singhal decodes equity, bond strategy post RBI policy decision

Stable corporate borrowing costs allow companies, especially those in debt-heavy sectors like infrastructure and manufacturing, said Rajkumar Singhal

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unanimously decided to hold the benchmark lending rate at 5.25 per cent, along expected lines. The rate-setting panel also maintained its "Neutral" stance, thereby indicating that the MPC is not inclined to turn conservative as a result of the geopolitical jitters.

 

The rate-pause, combined with the centre's decision to scrap taxes on foreign portfolio investor (FPI) holdings in government securities, was initially cheered by the market. The NSE Nifty 50 surged past 23,450, but was swift to retreat as the RBI lowered its gross domestic product (GDP) forecast and raised the inflation outlook for the financial year ahead.

 

The FY27 GDP growth forecast has been lowered to 6.6 per cent from 6.9 per cent, whereas the inflation outlook has been raised by 50 basis points (bps) to 5.1 per cent, as the RBI factored in the prolonged supply chain bottlenecks and elevated crude oil prices.

 

Despite the macroeconomic pain, the RBI has clearly communicated a wait-and-watch approach on the rates front. Here is how investors should position their portfolios to navigate the pause.   

Equity strategy: Lean domestic, hedge global

RBI's status quo approach keeps the macroeconomic volatility clouds away from investors' short-term outlook. The central bank's commentary indicates there's no knee-jerk reaction in the offing, which means that investors can focus on the market fundamentals and corporate earnings to decide on their equity playbook for now.

 

Stable corporate borrowing costs allow companies, especially those in debt-heavy sectors like infrastructure and manufacturing, to forecast their expansion plans and profit margins with a degree of confidence.

 

Rate-sensitive sectors like automobile and real estate are the primary beneficiaries, as predictable interest rates support the rollout of auto and home loans, which in turn drives demand. Investors should pivot towards domestic consumption themes, which directly benefit from predictable retail credit flows.

 

On the flip side, investors should be cautious about sectors that are more exposed to the geopolitical headwinds. Aviation, paints, and logistics are among the sectors deeply vulnerable to the Hormuz deadlock, and their scrips will continue to react adversely on upward movement in crude derivatives.

 

Investors should use the current rate stability to re-adjust their portfolios, while keeping in mind the overarching US-Iran conflict. For now, it's advisable to trim exposure to import-heavy sectors while locking into domestic-facing growth stories. 

Fixed-income strategy: The short-duration sweet spot

The MPC's unanimous vote on a neutral stance caps near-term yield volatility for bond market investors. Rate cuts are clearly off the table till the threat of imported inflation subsides.

 

At the current juncture, locking your investments into long-duration bonds will carry an unwarranted risk. The ideal strategy would be to bet on the shorter-to-medium duration curve. High-quality corporate bonds and 1-3 year accrual funds will be solid bets to tap the current attractive yields, while also shielding the portfolio from mark-to-market volatility arising from the global oil shock.

 

Meanwhile, the government's parallel move to abolish taxes on FPI investments in G-Sec will likely provide some softening of yields on the longer end of the curve. This targeted tax-waiver is aimed at triggering the much-needed flow of foreign capital to prop up sovereign bonds at the longer end. But for domestic investors, staying within the short-to-medium duration playbook will be ideal to insulate their portfolio from the global headwinds.         

 

(Disclaimer: This article is by Rajkumar Singhal, CEO, Quest Investment Managers. Views expressed are his own.)