This article is written by Mr. Pankaj Pathak Fund Manager - Fixed Income
In his press conference announcing yet another un –scheduled monetary policy announcement, the Governor of the Reserve Bank of India (RBI), Shaktikanta Das, invoked Mahatma Gandhi twice in his speech.
One to begin his statement and another one right at the end.
The prior announcements by the RBI during the lockdown have been termed as ‘bazooka’.
Suggesting that the measures announced by the RBI had so much fire power to have a significant impact on the financial markets.
Like this one on March 27,2020.(https://www.quantumamc.com/investor-education/quantum-direct/rbi-announcement-reason-for-cheer/qd-2144)
Todays, announcement was more ‘Ahimsa’-ic in nature.
Fewer announcements were made and the impact on the financial markets are unlikely to be large.
The Repo Rate, the rate at which the banks borrow from the RBI, was cut by 40 bps ( 0.4%) to 4.0%.
The Repo Rate now is lower than what it was after the global financial crisis of 2008-09.
The Bond market’s reaction is muted as ten year government bonds yields were down only 5-10 basis points in response to the 40 basis points cut in policy rates.
Going ahead, trajectory of bond yields will also depend on how,how much and by when does the RBI support the government’s borrowing program and any potential relaxation to HTM (Held to maturity) limits for banks on their investments in government bonds.
The RBI was clearly alarmed by the recent economic data and the extent of damage that the lockdown imposed due to Covid-19 has caused to the economy.
But, in terms of its overall monetary response to the disruption, today’s action by the RBI looks benign.
Despite being worried about growth, they continue to remain inflation focused.
We thus we see limitations on how much further lower the Repo Rate can decline from here.
The most important statement from the RBI today was the admission that the GDP growth for Fiscal Year 2020-2021 will be negative.
The governor appeared ‘somber’ than usual and one could sense from his statements that the RBI seems more concerned about the growth situation than the government.
He opened his speech with this quote of Mahatma Gandhi:
“It is when the horizon is the darkest and human reason is beaten down to the ground that faith shines brightest and comes to our rescue.”
And added… but “Once again, central banks have to answer the call to the frontline in defence of the economy”.
That also explains why 40% of the ‘AtmaNirbhar’ Economic package of INR 20 lakh crore (INR 20 Trillion) was accounted for by the RBI alone.
He ended his main part of the speech quoting the Mahatma again:
As the nation prepares for this future, the words of Mahatma Gandhi should inspire us to fight on: “We may stumble and fall, but shall rise again…….”
… …… Today’s trials may be traumatic, but together we shall triumph.
Central banks are typically seen as conservative institutions. Yet when the tides turn and all the chips are down, it is to them that the world turns for support.
That indeed is true. The RBI has done everything and more to try and ensure that the financial markets function properly, market interest rates have moved lower, financial institutions have enough liquidity to grow, that in times of stress your interest cost and hence your EMI burden is lower, due to COVID dislocation you get forbearance on your EMIs.
Where the RBI has struggled and will continue to struggle would be to get banks to lend to those people who are perceived to be risky. That aspect cannot be solved by lower interest rates and easy money. It can only be solved if the risk perception goes and for that the government needs to implement on some of aspects announced in the recent package announced. And do more quickly. It is already too late.
As many of the readers of Quantum Direct will appreciate, this is precisely why at Quantum we have been cautioning investors over the last 2 years.
We have repeatedly said that this crisis in NBFCs and Debt mutual funds will continue and hence investors need to avoid the temptation of trying to earn that extra 1-2% on the fixed income investing.
We have advised to prioritise the safety and liquidity over returns in your debt fund or any fixed income investments including in fixed deposits.
At this juncture we now see a very high level of uncertainty even in the government bond markets and for investors in debt funds it would be prudent to also avoid high market risk. (the risk of change in NAV due to change in market interest rates).
If at all one has appetite to tolerate near term volatility and can remain invested for a longer time frame dynamic bond funds (which do not take too much credit risks) would be a better alternative than long duration funds or gilt funds.