India has completed two months of the nationwide lockdown, meant to curb the spread of the novel coronavirus pandemic. So far, essential services, some industries, railways, and more recently, domestic aviation was allowed to resume.
Further, the Government has announced its “Unlock 1.0” plan to open religious places, offices, shopping malls, restaurants, and hotels from June 8 in non-containment zones across the country. It will be a good start to begin with as the economic activities came to a grinding halt amid the lockdown period.
The Indian government has issued clear guidelines required to be followed for each type of establishment. A failure to follow these social distancing guidelines can increase the risk of a rise in containment zones as economic activity resumes delaying further recovery.
On the global front, Global GDP growth estimates for CY20 continue to be downgraded further due to the pandemic. However, the slowdown in incremental cases, progress towards medical solutions, and re-opening of economies have been some positives. Central banks also expected to further expand their balance sheets. However, the Civil unrest in US and flaring of US-China tension are new risks.
On the local front, India is playing catch-up with global markets ignoring the ongoing pandemic, the country-wide migrant crisis, cyclones, earthquakes, locust attacks, border tensions with neighbours and a ratings downgrade.
We believe that the near term upside is expected to be limited due to the continuing earnings downgrades amidst the COVID-19 uncertainty, poor consumer demand, low corporate earnings growth, and a stressed financial sector with likely NPA pressure after extension in the moratorium period. Hence, we do continue with our cash call and are closely keeping a tab on the ongoing developments.
On the debt front, the RBI has been aggressive in policy response so far whether it may be rates, liquidity, and transmission. Yet it has only met with partial success in achieving the desired outcomes. Given the sharp jump in the quantum of bond supply (both G-sec and State Development Loans), the absence of any announcements for managing the supply such as Open Market Operations(OMOs) or any other similar measures will lead to steepening of the yield curve.
Hence we believe that exposure to debt markets should be taken through short term funds for 1-2 years investment period and Banking and PSU debt funds for more than 2 year investment period.
While structural view remains unchanged, we will take the advantage of tactical opportunities as and when possible.
Credit spreads are elevated, but they also reflect the economic uncertainty and distress in the financial system. Hence we continue to avoid credit risk even if the spreads are higher.
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