Estimate is that primary markets will be biggest beneficiary of TLTROs, says Axis AMC’s R Sivakumar

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Published: April 1, 2020 4:15:38 AM

From our perspective, we see this as a big support not just to mutual funds, but also the support to the primary markets because 50% of the amount is to be used in primary markets and remaining 50% in secondary markets.

I think RBI has acted decisively to ease stress from bond market and the economy. I think RBI has acted decisively to ease stress from bond market and the economy.

The Reserve Bank of India (RBI) has acted decisively to ease stress from the bond market and the economy with measures announced last week, says R Sivakumar, head of fixed income at Axis AMC. In an interview with Chirag Madia, Sivakumar says one of the big challenges is that market continues to remain illiquid and very thinly traded due to the lack of market participants arising as a result of work from home and other restrictions. Edited excerpts:

What is your outlook on debt markets, post the RBI policy?
I think RBI has acted decisively to ease stress from bond market and the economy. First, with 75 basis rate cuts, second through large liquidity support through targeted LTROs and lastly, the credit measures including three-month delay and loan serving. All these things are large steps towards easing the pressure in the markets and we have seen immediate fall in yields of 150 basis points (bps) in a single day after the policy announcement. So, I would say that stress, which was built up over the past two weeks, has been substantially erased and yields are back where they were two weeks ago. But, you look from different angle the RBI has cut the rates by 75 bps, but it is yet to reflect in the bond yields, as they are at the similar level when repo was at 5.15%. While the stress is out but there is a huge opportunity for bond yields specially at short end to drop in response to the rate cut and other liquidity measures of the RBI. However, one big challenge is that market continues to remain illiquid and very thinly traded due to the lack of market participants because of work from home and other restrictions. So, it will take some time for normalcy to return in debt market. While there are chances of a cut in interest rates going forward, RBI will be keenly looking at fiscal and other economic prospects which will be adopted by the government. Having said that, the quantum of rate cut is difficult to predict at this point of time.

With announcement of measure such as TLTRO by RBI, how much debt papers are you planning to sell to banks?
I think announcement of targeted long-term repo operations (TLTRO) is itself a big thing and the yields have dropped in response. From our perspective, we see this as a big support not just to mutual funds, but also the support to the primary markets because 50% of the amount is to be used in primary markets and remaining 50% in secondary markets. Our estimate is that primary markets will be biggest beneficiary of TLTROs. I believe that as an industry there will be some amount which will be used under TLTRO, but at this point of time, we don’t have any specific plan on how much we will sell as far as TLTRO is concerned.

What kind of papers are you selling right now?
When you have such dislocated market condition, we don’t do large changes in the market because markets are illiquid. So, we would wait for normalcy to return in the market before we do any significant reposition in the portfolio. In the past few days, there has been some activity in money market instruments and some short-term corporate bond (PSU segment) but otherwise it’s very limited. I think there is an opportunity for rates to go down, when things improve, we will participate in that.

Do you think more TLTROs will be announced by the RBI?
RBI has already announced TLTROs up to Rs 1 lakh crore and they have done only part of it and still there is more amount to be done. Having this tool in RBI’s arsenal itself allows the market to be more orderly. Before they do more TLTROs, they should first look at how banks deploy the cash from the first TLTRO. Announcement of the TLTROs have achieved the goal to bring the yields down and they have some time on their hands before they announce steps for further liquidity.

What kind of strategy are you adopting at this point of time?
We are still running reasonable duration position which means we are in long duration across the portfolios. Like mentioned, the RBI rate cut is still not transmitted into the system and therefore, we feel that there is an opportunity for investors to stay invested in this market.

As a fund manager, what are the key risks or concerns in the debt market?
There are couple of things which are concerning us right now. The first thing is that markets are waiting to see what directions fiscal policy will take in terms of supporting the economy and that is the reason why G-sec yields have not reacted to the rate cuts. Second, there could be some cash flow pressure in various companies, we feel it will be largely in smaller corporates where funding can become challenging in the current environment. So obviously, we will be very watchful from what is happening in the credit side of the market.

Given the current situation, what strategy should investors adopt at this point of time?
We have been advising investors over the last one year to maintain reasonable position in short duration funds or even in the medium to long duration depending on their risk profile. In fact, our position for the past few months have been that investors should have allocation towards AAA rated products in short term or medium to long term strategies as there are some uncertainties around credit markets. However, I would say that investors should stay invested when there is period of volatility as past history shows for those who have continued to invest during such times, their portfolio has done quite well.

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