Debt Market outlook: Risk vs reward game to continue as RBI focuses on liquidity dynamics

RBI is increasingly focusing on transmission as it continues its FX swap program and OMO auctions to supply durable liquidity and improve transmission.

FIIs mainly invest in equity and bond market of India. Since Lok Sabha Elections are underway, they are in the wait and watch mode. Photo: Pixabay

Debt market looks better place when it comes to AAA-rated corporate bonds with two to five years lock-in. Market experts are of the opinion that the duration part of the curve has frustrated lately due to heavy market positioning pre-policy on expectations of change instance, which did not materialise. They expect that the Central Bank's FX swap program and OMO auctions to supply durable liquidity and improve transmission.

Speaking on the Debt market outlook Suyash Chaudhary, Head – Fixed Income at IDFC AMC said, "RBI is increasingly focusing on transmission as it continues its FX swap program and OMO auctions to supply durable liquidity and improve transmission. Certainly, front end AAA corporate bonds between 2 to 5 years are better placed in terms of risk versus reward to play this environment." Suyash Chaudhary went on to add that the duration part of the curve has frustrated lately due to heavy market positioning pre-policy on expectations of change instance which did not materialise.

Asked about the preference Suyash Chaudhary of IDFC AMC said, "Our preference here, as indicated before, is via spread assets like SDLs and the best quality AAA corporate bonds due to relatively favourable demand-supply dynamics. The market for lower-rated credits remains dislocated and we would continue to advise caution there. There is a genuine liquidity issue in the lower rate space and this is constraining true price discovery as well. One will have to wait for some of these issues to settle down, and in particular allow price discovery to start happening through the open market, before taking any sort of a serious relook at this space."

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Speaking on the Debt and Corporate Bond SEBI registered investment expert Jitendra Solanki said, "Remember, buying a debt plan or corporate bond is not an investment. In fact, you are giving loan to the issuing institution. FIIs have done heavy selloff in recent times and it is because of the weak global cues. Post-Lok Sabha polls, FIIs are expected to increase their investment in India as Sino-US trade spat has further escalated and in coming times, FIIs are expected to fish out their money from China and pump that into the Indian market."

Standing in sync with Jitendra Solanki's views Prakash Pandey, Head of Research at Fairwealth Securities said, "FIIs mainly invest in equity and bond market of India. Since Lok Sabha Elections are underway, they are in the wait and watch mode and once the picture gets clear about the post-General Elections 2019 scenario, we can further witness some fresh investments from the FIIs."

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