Q. How do you see the impact of the Covid-19 pandemic impacting the economy and the debt markets in the coming months?

Answer : The lockdown measures enforced to stem the spread of coronavirus had a sharp impact on India’s economic activity and growth. India’s Gross Domestic Product (GDP) for Q1FY21 contracted sharply by 23.9%, shrinking to the lowest level on record. Nominal GDP growth also declined to a record low of -22.6%. In an attempt to mitigate the impact of the lockdown on the country’s growth and give a fillip to business and economic activity, the government has announced several economic packages. These amount to nearly 10% of GDP with approximately 75% of them pertaining to liquidity or credit guarantee schemes.

Tight Credit Markets - Even before the onset of the coronavirus, the Indian credit markets were already exhibiting some stress regarding the ability of NBFCs/ corporates to pay their liabilities on time. The freezing of the economy, in the wake of the virus, only served to deepen the stress in the sector. The government announced various measures (implicit government guarantees, providing interest rate moratoriums, and making it non-remunerative for banks to park money in Reverse Repo) to infuse liquidity and reduce stress in the sector. Despite this, banks continue to be wary of lending to corporates and prefer parking all the money at the Reverse Repo rate.

Inflationary Concerns Impacting Rate Decisions - In its August meeting, the Reserve Bank of India (RBI) kept the repo and reverse repo rates unchanged while maintaining an accommodative monetary stance. However, the MPC highlighted that the June CPI data has added uncertainty to the inflation outlook. Future rate decisions will be influenced by the inflation trajectory, the development of monsoons, and pickup in economic activity. Going forward, we believe that once the economy starts healing due to the excess monetary supply and the ultra-easy monetary policy we might see inflation moving out of the comfort zone of RBI. As a result, the RBI might have to relook its operational rates.

Data Source: Ministry of Finance, RBI, and UBS

Q. The debt funds have witnessed liquidity issues in the recent pasts. What is the situation now? Do you see the situation getting better any time soon?

Answer : The liquidity issues in the past were a combination of Credit concerns as well as the risk off triggered in the global markets due to COVID concerns as well as dollar liquidity squeeze.

Since then, be it Developed economy central bankers as well as our Central bank; they have infused good amount of liquidity in the banking system and this seems to have reduced the liquidity issues for broader section of the economy. However, this Pandemic and reduced economic activity has resulted in uncertainty over the asset side of balance sheet of corporates and thus we do find restraint over funding of leveraged players and lower credit issuers.

The govt. and RBI have been sensitive towards flow of liquidity through the sections of the economy and we don’t see liquidity freeze in the near term but lenders / Investors will be looking to cherry pick the underlying exposures.

Q. Recently Fitch downgraded the long term Issuer Default Ratings (IDR) of many Indian banks to negative. Should we be worried about the stability of our banks given the risks of rising NPAs this year?

Answer : Private banks within financials have gradually been gaining market share from PSU banks over the last two decades which is a structural trend likely to continue going forward as well. We believe Private banks are equipped with adequate capital and better access to the markets for additional capital if need be besides stable management, focus on retail business and fee income leading to better return ratios. The banking space has potential for growth even from next 3-5 year perspective due to lower credit costs for corporate banks and higher retail growth for all as long as the retail credit cycle continues to be on a good wicket as it has been in last many years.

Q. Are debt markets safe in today's market? Which category of funds would you suggest to investors to keep their capital safe with relatively decent returns?

Answer : In the current environment, we believe that most investors are focusing on safety rather than returns. Consequently, we have been seeing a lot of interest in PSU and Banking papers. We believe that the measures announced so far by the government coupled with the phased opening of the economy could encourage banks to start lending to the corporate again. We expect banks to initially step up lending to the AAA rated corporates followed by the AA rated corporates. We continue to be vary about chasing yields in prefer to adopt a conservative approach for the near-term. We prefer to invest in liquid and high quality investments with a strong focus on PSU/ PFI/ Sovereign paper.

Q. What is the investment strategy being followed by your flagship debt funds? How are you selecting the securities?

Answer : We at BNP Paribas believe that “we are investors and not lenders”. Our research effort focuses on the credit quality of issuers. The financial standing is determined based on the past financial performance and the expected future performance of the company, its operating environment and the economy in general. Thus, our investment process is designed towards following strict internal credit policies which derive comfort from operating cash flows, sector views and healthy financials with strong parentage.

Q. Amidst the current volatility and uncertainty surrounding debt markets, what would be your message to the investors?

Answer : The pandemic has to led to uncertainty over the revenues/ Asset side of the balance sheet of corporates and thus , we advise investors to remain invested in the underlying exposures where the providers of capital are willing to lend . Currently, the providers of finance is RBI through various liquidity tools via Banks and the government through its implicit ownership support. Thus, we should remain invested in PSU / PFIs and corporates with good parentage / proven track record and should avoid any credit upgrade investment ideas.

Disclaimer: The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL)makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. The words like believe/nbelief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, Asset Management Company, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

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