Last updated: 22 May, 2020 | 03:03 pm
The RBI has announced another set of measures to tackle the economic impact of the Coronavirus pandemic. Here’s a list of some important measures, and their likely impact on your investments and liabilities:
Impact on Investments: G-sec yields remain volatile (currently at 5.9%). Bond prices have also moved up sharply. This will directly impact your mutual funds with high duration. As the interest rate scenario continues to remain volatile, we advise you to stick to low duration high credit quality mutual funds. Shift your entire portfolio to AAA rated bonds.
Impact on Loans: Home Loan EMIs will reduce further, however this is subjected to Banks transmitting rate cut benefits, we’ll be keeping you up to date on rate cuts specific to your bank.
Moratorium on EMI's: Extended further by 3 months
Impact on EMI: Your interest will continue to accrue if you opt for it. Using our Loan Deferment Calculator, you can check if extending the moratorium is worth opting for? We recommend you to continue paying your EMI, and if possible, to avoid additional interest expense.
Impact on Investments: The NBFC sector is already witnessing a huge liquidity crunch. This moratorium will further put pressure on future debt obligations of these companies. Not all companies are well equipped to handle such a crisis. A major government intervention is required. Therefore, we again stress on the point of maintaining 100% allocation to AAA rated companies.
Emerging markets such as India face risk of further capital outflows as global economies head into recession following Covid-19 pandemic. Gold could be a safe haven in this scenario. Countries maintain reserves of gold to support their currency volatility and hedge their risks. With Balance sheets across the world expanding (more debt levels), these reserves are more important than ever. All this adds up to a favourable medium term environment for Gold prices.
While the economy is expected to shrink, the inflation rate is expected to be firm. This could lead to a difficult ‘stagflation’-like situation, in case inflation rises beyond control. Stagflation is characterised by high inflation combined with high unemployment and stagnant demand in a country's economy. In this situation, risky asset classes such as equities would continue to underperform. Hence, we advise you to seek capital protection rather than chasing returns. Also, high duration bonds and debt funds are not advisable in an increasing inflationary environment. Therefore stick to short duration high credit quality funds.
The RBI has been acting to ease liquidity pressures and enable banks to meet their requirements in these stressful times. However, the focus thus far has been a lot on the supply side in terms of rate cuts & liquidity but unless demand side stimulus is given, it would be difficult to boost the sentiments of investors, and consequently raise capital. Growth will require a massive demand stimulus from the government
This is a fallout of the ongoing lockdown. Production and Manufacturing sectors are the worst hit in this pandemic. In its minutes, the RBI has noted that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress.