By Pankaj Pathak
The year 2020 has been an extraordinary year on quite a few accounts. It has been a year of facing, studying and adapting to the unknown. The manner in which a variety of markets have responded to the crises would have altered investor behaviour as effectively.
Mixed efficiency
Fixed earnings investors witnessed yet another year of mixed efficiency across a variety of categories. Interest prices on bank deposits and returns on liquid and revenue market place funds continued to go down and now at levels final observed throughout the 2008 economic crisis. Credit danger funds had but yet another painful year and in some circumstances wiped out a considerable aspect of investors’ savings. Contrary to these, investors in extended duration and higher credit excellent bond funds enjoyed yet another year of fantastic efficiency.
The RBI continued its uncomplicated monetary policy by cutting policy prices and infusing a lot of liquidity into the banking method. The policy repo price has been decreased by cumulative 115 basis points and the reverse repo price by 155 basis points in 2020. This was just after 135 basis points reduction in the policy prices in the final calendar year. The policy repo price at the moment stands at 4% and the reverse repo price at 3.35%
RBI’s action on liquidity was even more aggressive. Liquidity surplus in the banking method has been kept at more than `6 trillion for most of the time this year. This higher liquidity surplus has kept the brief-term revenue market place prices such as 3-month treasury bills or PSU CP/ CDs under the reverse repo price. Currently, the 3-month treasury bills and PSU CPs are quoting under 3.2%.
Going into 2021, the drivers of fixed earnings efficiency are set to modify. With inflation hovering above the policy repo price, area for additional price cuts may possibly not be accessible. We count on RBI to commence normalisation of monetary policy by middle of 2021.
Fiscal consolidation roadmap
Just like monetary policy, the government also stretched its fiscal position to deal with the crisis. Even ahead of this pandemic, consolidated fiscal deficit of Central and state governments was at elevated levels. In the crisis it faced a double whammy of decrease tax collections and an enhanced spending on healthcare.
In the existing fiscal, the Centre’s fiscal deficit could rise to 8% of GDP when states could add about 5% of GDP. India’s public debt could jump to about 90% of GDP this year. This is a single of the highest amongst comparable rated emerging economies.
A medium term fiscal strategy will be necessary to bring down fiscal deficit. The government’s roadmap for fiscal consolidation will have a bearing on bond markets. Market will closely watch for cues in Budget 2021-22.
Outlook for 2021
In 2021, bond yields could reverse their downward trend and grind up towards the year finish. Short finish prices (up to 3 years maturity) are at the moment priced aggressively due to excess liquidity hence carrying maximum danger of reversal. The longer segment may possibly continue to get RBI’s assistance from OMO purchases and twists. Thus the yield curve will most likely flatten in the subsequent year (brief term prices move up more than longer ends).
Fixed earnings investors must acknowledge that the most effective of the bond market place rally is now behind us. Currently bond yields are at multi-year lows and scope for capital gains appear restricted. Going into subsequent year, investors must decrease their return expectations from fixed earnings funds.
The writer is fund manager, Fixed Income, Quantum AMC