In a surprise move, the Reserve Bank of India (RBI) lowered the key repo rate by 75 basis points (bps) to 4.4 per cent and slashed the reverse repo rate by 90 bps to 4 per cent. Central Banks around the globe are adopting a ‘whatever it takes’ approach to provide the required boost to the economy in this period of crisis and the Reserve Bank of Indian (RBI) was expected to follow suit. Positive macroeconomic indicators, spread of India’s interest rates above global interest rates and lower inflation expectations provided the RBI and government large headroom for giving monetary and fiscal stimuli. Also, the RBI has $480 billion of foreign exchange reserves, which puts India in a comfortable position in terms of foreign exchange reserves.
In the debt market, risk aversion and flight towards liquidity had led to a spike in yields by close to 100 -150 basis points (bps) across the corporate bond space. The yields have risen more sharply in the short-term segment as compared to the medium-and-long duration space. Such sharp spike in yields was last seen during the 2008 global financial crisis (GFC) and 2013 taper tantrums. In both the instances, investors have subsequently witnessed positive returns for categories across the fixed income space. However, these levels of yield are not sustainable.
We believe debt market is very attractively priced from a short-to-medium term perspective. While conservative investors can consider investing into low, short and medium duration debt products, those with a higher risk appetite can consider investing in accrual funds as the spread over repo in accrual space is the highest at this point making accrual space very attractive.
Historically, it has been observed that any global event due to which a market meltdown has occurred have proved to be lucrative investment opportunities. At such times, it is important for investors to:
1) Stay put with one’s existing investment;
2) At opportunities like in present market conditions, investors should top-up their existing systematic investment plans (SIPs) and other investments made into mutual funds. Now is the opportunity to accumulate more units at a relatively lesser price;
3) Uncertainty breeds market volatility. Therefore, be invested in products that can make the most of market volatility. Opt for asset allocation or balanced advantage category of funds; and
4) Do not ignore investing into debt. Debt markets, too, present an attractive investment opportunity.
The current market correction would be a first of its kind experience for those investors who have entered the market over the past few years. However, if they were to stay put or enhance their investments during these uncertain times, they have the opportunity to make outsized gains over the next few years.
Among sectors, valuations across the banking space – private and public sector – have improved significantly. We have always been selectively positive on themes like corporate lending banks, good liability franchises and customer centric non-lending franchises. We have improved our exposure to select banks that have good asset-liability management, high current account, savings account (CASA) franchise and broad-based financial services presence. Non-bank finance companies (NBFCs) might see moderation in loan growth, but we are positive on select gold financiers and insurance, i.e. segments which may benefit from India's long-term structural growth.
S Naren is executive director and chief investment officer at ICICI Prudential AMC. Views are his own.
As told to Puneet Wadhwa