The latest events in the recent past play a crucial role in the souring of these sentiments. Franklin Templeton, a huge buyer of high-yield Indian notes, recently shut down six of its debt funds in April. Earlier this week, the market regulator also allowed some bond funds to hold more treasury bills and government bills.
Investors are now turning their focus to quality within their fixed income. A big factor here is the lack of adequate liquidity as well as price discovery.
Finance Minister Nirmala Sitharaman earlier this month had also announced a 300 billion rupee credit line for non-banking firms. She had also assured that the government would fully guarantee investment-grade securities issued under the plan. To further help lower-rated financiers, the administration has also agreed to provide partial guarantees to debt rated AA and below, thereby injecting another INR 450 billion. The central bank is also expecting the economy to contract in the ongoing financial year. RBI governor Shaktikanta Das cut the key policy rate by 40 basis points to 4% in a briefing last week.
Nevertheless, IDFC Asset is still holding sovereign, quasi-sovereign, and top-rated corporate debt. Tata Asset Management Ltd. is purchasing sovereign and top-rated state-run firm’s debt. On the other hand, Quantum Asset Management Ltd. is altogether avoiding credit. The underlying reason here is that there are fears that the default rate in India will rise after the lockdown has successfully brought the country to a standstill.
Bank credit is expected to be low, in a single digit. Lenders will naturally play it safe, and invest in government and AAA state-run bonds. Staying in cash is not profitable right now since the overnight rates are in the 3% band. A 100-basis point cut in the coming months in the reverse repo rate is also expected, and so is a 50-basis point reduction in the repo rate.
Even before the government has raised its borrowing target by 54% to 12 trillion rupees, Quantum Asset reduced the duration of its bond funds.
As per Edelweiss Asset Management Ltd., the company would stay focused on AAA bonds and liquid, though value emerging on non-AAA rated bonds is foreseen shortly. The company would also analyze credit and risk-reward ratio in the light of the lockdown, and the impact that it has had on businesses in the country.