Is this the right market to book profit? The answer, at least to our mind, seems to be in the negative, because when there is heightened fear and there is heightened paranoia, markets do not really reflect the true potential in any asset class, and that would include gold also. I think these are markets to just basically lie low and do some bit of market distancing. It is very critical not only to keep away viruses, but also to keep the mind from thinking about market direction. It is very important because the natural tendency is to go with the flow or buy what we see around us, and that may not be the optimal decision to take in this kind of a market.
So what is the message for investors right now, because many believe this is the kind of panic which should be bought into? What is the sound advice that you would give to people who are looking at investing in debt, for instance, right now?
We are clearly seeing global riskoff sentiment and the recent development of the US easing rates by 100 bps to zero is unprecedented. This obviously will have a positive fallout on bond yields across the world, and India will be no exception. We have seen a kind of paranoia in the bond market also. We have seen high grade or blue chips equivalents yields go up by almost 100 bps on the corporate bond side. Government bond yields have not come down at the pace at which they should have come down. These are fantastic entry opportunities from a yield perspective. But have a longer investment horizon. These are not times to take tactical bets; but for every debt investor today is an entry opportunity. There is no doubt in our minds on that.
Historically, when we have seen moments like these when central bankers have always come out to rescue and they have always changed the market. Now today markets are getting nervous because central bankers have acted. Generally the view is that central bankers do not have the ammunition and the fire power, so if that is the underlying thought, where markets do not even want to believe what Fed is doing I wonder what is the backstop going to be?
We are in unprecedented times, which require unprecedented actions. US Fed cutting rates by 100 bps, not waiting for even three days — the official rate review is on 17-18 — is clearly telling you that it wants to be slightly more proactive than being reactive. We believe coordinated efforts by central banks are actually living the maxim: better be safe than sorry. If you notice across the world, including the US, it is not just rate cuts, there have also been liquidity boosters. It is a combination of all of these factors, not just moral suasion, which us telling the markets that ‘look growth is our priority.’ If you look at the MSCI World Index, that is actually trading at 10-year average low, which is clearly telling you that there will be pain points in terms of growth. So central bankers across the world are coming out in the open and telling you ‘look growth will not be an issue, and therefore we believe something similar would be indicated by our central bank also on or before April 3, when it officially meets.
For an outsider, the first impression is that we have not heard anything from the government, all we have heard from the CEA and perhaps from the ministry is that the decline in crude prices is great news. When fuel prices have come down, the government has actually increased excise duty. After that it says it is committed to selling BPCL. When it is not honouring the fuel deregulation in terms of messaging, do you think the government has not done anything like others have done?
See, two things. We need to bear in mind is that when there is a global riskoff; there is an accelerated sell pedal on in every emerging market, and India is no exception. Therefore we see FPIs, which are the external world, actually sell almost Rs 45000 crore worth of equities plus bonds halfway through the month. The good news is obviously that domestic investors are buying. But the second most important thing is that coronavirus is actually an imported issue for India, though we are obviously reeling under the pressure of that. Therefore, I think, appropriate messaging and timely messaging is what the markets will focus on. It is not really about rushing in a panic sort of a mode.
The panic in the rest of the world is natural, because we have already seen the holistic impact of it. We are not saying we need to be complacent, but we have already seen central bankers announce dollar liquidity to neutralise the rupee impact. We have seen variable repo being announced. We remain confident that we will see a slew of measures by the central bank, but panicking and trying to jump the gun may not be the right kind of messaging that we are would really want to send across.
If I may deviate a tad and talk about the entire scenario around YES Bank and AT-1 bonds being written off, do you think we could see some risk aversion and return to the credit markets due to that despite the kind of liquidity measures that have been adopted by RBI?
We have already started seeing risk aversion on the credit side. By the way it is not just non-AAA bonds, which are reeling under this pain, it is also the high grade bonds. To give you some cases in point, the two- to three-year segments of high grades, the largecap equivalents of fixed income, have actually seen yields go upwards of 75 to 100 bps in response to what we are seeing. It is therefore essential that we have some sort of confidence-building measures, some sort of liquidity window at an appropriate time so that this sentiment does not snowball into something which we probably cannot retrieve. The bond market, specifically on the credit side, had actually started seeing signs of normalcy – they had limped back to normalcy and the last 10 days have kind of undone it. We really require the bond market to see some solid confidence-building measures to ensure that the snowballing impact does not jeopardise the good job that we have done in last 15 to 18 months.