Navigating debt landscape in post-Covid world

The past one year has witnessed a rollercoaster life for every one of us and so is the volatility among all the asset classes. While equity market has hogged the limelight and so are the shenanigans of the crypto markets, occasional views are covered about debt markets. Just little over a year back, the debt market issuers and regulators were trying to instil confidence among the participants. This was just on the back of a large fund house closing some of their debt schemes due to the lack of liquidity among their invested securities.

The event has created tremors among the investors and has spilled across the mutual fund industry. Also, the stringent lockdown in the previous quarter had casted doubts on the resilience of the credit worthiness of the corporate India with possible defaults staring into the future. There were lots of actions by both the central bank, RBI and the central government to ease the situation. But the loan moratoria announcements only aggravated the assumptions and the forecasts leading to further panic among the investors.

The interest rates were brought down to the decadal lows and were staring at increased infection rates and mortality post the lockdown. In the hindsight, we managed to conquer all those fears and stood victorious with corporates improving their productivity, streamlining operations and retaining profitability. From a fragile situation, the overall corporate behaviour was enhanced and the results are evident from more credit related upgrades than downgrades by the rating agencies at the end of the fiscal.

Despite the second wave of the pandemic impacting the normalcy, the business world successfully maneuvered around the situations to remain formidable. Though, it's too early to paint a picture of niceties, it still needs to be acknowledged. The price rally in the input materials like metals, oils, cement and other materials has seeped the inflation into mainstream. The debate is still alive whether it's only tenuous or tenacious, it certainly is evident and biting currently.

This has led an increased pressure on both the central bank and the govt.

While banks are being flushed with deposits enjoying double-digit pace, the credit growth is languishing at about five per cent in the last few quarters. Also, the risk-taking ability being subdued with the banks, capital remains unproductive. On the macro front, Indian economy is mixed with stretched balance sheets and extended fiscal deficits. But, bolstered by forex reserves and surplus current account, the rupee also has been defiant considering the onslaught of oil prices in recent weeks along with headwinds of dollar flight.

With this background, what should be the strategy of risk-averse investors to make productive gains on their investments. The debt MFs have buried the last year's debacle behind and are well equipped for the challenges. The new auction by RBI for the 10-year GSec has gone about 6.6 per cent which is higher than the current prevailing yields which is a comforter for the markets that the central bank is loosening the grip on the rate direction. Still, the spread for the medium-term paper of 4 to 6 years is attractive for opportunity.

Existing investors in various schemes shouldn't act in haste and should stick to their initial goal timelines so that the intermittent volatility is normalized. For investors taking fresh exposure to debt could ideally stick to the shorter end of the curve and stick to portfolios with lower maturities as the interest rate could be on a ascend in near future. Though, a rate hike would be the last in the order of the events, one could take a cue when the adjustment of the repo-reverse repo rate begins.

The current growth is still nascent, but with an upward bias is a point of solace for now. Any fresh wave of infections and the intensity would define the pace of rate hikes in the near future. Credit as a category of investment is also appealing for those with higher risk appetite as a tad lower rated papers are still at a steep discount. For those willing to stretch that extra in risk could be amply rewarded through credit risk funds at this juncture. For the rest, it's ideal to stick to a roll-down strategy and those of floating interest rate fund to make better out of their capital.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])