This is an opportunity to make outsized gains over the next few years

In a surprise decision, the Reserve Bank of India (RBI) lowered the key repo rate by 75 basis points (bps) to 4.4% and reduced the reverse repo rate by 90 basis points to 4%. Central banks around the world are taking a “whatever it takes” approach to give the economy the boost it needs in this time of crisis, and the Reserve Bank of Indian (RBI) should do the same. Positive macroeconomic indicators, the spread of India’s interest rates above world interest rates, and lower inflation expectations have provided the RBI and the government with significant leeway to provide monetary and budgetary stimuli. In addition, the RBI has $ 480 billion in foreign exchange reserves, which places India in a comfortable position in terms of foreign exchange reserves.

In the debt market, risk aversion and the flight to liquidity led to an increase in yields of almost 100 -150 basis points (bp) on all corporate bonds. Yields increased more sharply in the short-term segment compared to the medium and long term space. Such a sharp increase in yields was last observed during the 2008 global financial crisis (GFC) and the crisis of 2013. In both cases, investors subsequently recorded positive returns for the categories in the fixed income securities space. However, these performance levels are not sustainable.

We believe that the debt market has a very attractive price in a short and medium term perspective. While conservative investors may consider investing in low, short and medium term debt products, those with a higher risk appetite may consider investing in stabilization funds as the spread repo in the regularization space is the highest at this stage, which makes the regularization space very attractive.

Historically, it has been observed that any global event due to which a market collapse has happened has turned out to be lucrative investment opportunities. At these times, it is important that investors:

1) Stay on your current investment;

2) On occasions as in current market conditions, investors should supplement their existing Systematic Investment Plans (SIPs) and other investments made in mutual funds. Now is the opportunity to accumulate more units at a relatively lower price;

3) Uncertainty generates market volatility. Therefore, invest in products that can make the most of market volatility. Choose an asset allocation or a balanced benefit category; and

4) Remember to invest in debt. The debt markets also present an attractive investment opportunity.

The current market correction would be a first of its kind for investors who have entered the market in recent years. However, if they were to stay put or increase their investments in these uncertain times, they would have the possibility of making disproportionate gains in the coming years.

Among the sectors, assessments in the banking sector – private and public sector – have improved considerably. We have always been selectively positive on topics such as corporate credit banks, good liability franchises and customer-focused non-credit franchises. We have improved our exposure to selected banks that have good asset-liability management, a high current account, a savings account franchise (CASA) and a large presence in financial services. Non-bank finance companies (NBFCs) may see moderation in loan growth, but we are positive on some gold finance and insurance companies, that is, the segments that could benefit from the long-term structural growth of India.

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S Naren is Executive Director and Director of Investments at ICICI Prudential AMC. The views are hers.

As told to Puneet Wadhwa

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