Aditya Birla Sun Life AMC Limited

Investment Outlook - Debt Market - February 2020

Feb 24, 2020
4 mins | Views 9028

In the recent monetary policy, while the RBI kept policy rates unchanged, the RBI gave a big fillip to markets with its policy action of introducing a series of path breaking decisions to boost monetary transmission and support credit supply to the economy via

  1. Introduction of long-term repo of one year and three –year duration for upto a total amount of 1 lakh cr at the policy repo rate

  2. exemption of banks from CRR requirement for incremental retail loans for automobiles, residential housing and loans to MSMEs till July 31, 2020 and

  3. Extension of one-time restructuring without asset classification downgrade for GST- registered MSMEs which are in default but standard as on 1-Jan-2020.

After cutting rates proactively in 2019, the RBI is now trying to ensure monetary transmission so that the earlier rate cuts and abundant liquidity starts flowing into the real economy. The 1-3 year Long Term Repo Operation (LTRO) would likely result in a collapse in credit spreads and would help in better transmission of rates. This would provide much needed respite to the credit markets and provide a fillip to credit growth through cheaper access to finance.

Tepid Growth

While there are some signs of growth bottoming out, the growth numbers continue to be anaemic and many sectors remain under stress. While easier monetary policy and natural business cycle reversal would likely result in somewhat better growth numbers going ahead, Corona Virus is emerging as a risk and we continue to keep a close watch on it and the knock on impact on various sectors including supply chain impact.

Financial Sector

This sector shall be a big beneficiary of the LTRO. We continue to remain selective wrt investing in NBFCs. We shall look for those entities which have long vintage, have good pedigree and are lowly levered. Housing finance companies would continue to have Net interest margin (NIM), asset quality and profitability pressures in 2020. Systemic MSME NPA rates have broadly remained stable at elevated levels, mostly skewed by the PSU book which is at ~16% GNPA. A large part of the wholesale NBFC book (primarily real estate) shall now start emerging from moratorium and coupled with the tepid pace of real estate sales, uncertainty persists. In the sub segments, while we are positive on retail NBFCs, we continue to keep a watch on employment and wage statistics, however we remain cautious on wholesale financiers, mortgages and LAP.


In Roads, particularly toll roads, we continue to keep a watch given the impact the slowing economy has had on toll revenues. Meanwhile, the average daily toll income of NHAI has registered a sharp increase to Rs 85-80 crore as compared to an average daily collection of ~ Rs 60-65 crore post introduction of Fasttag reducing leakage which would help NHAI to put more projects on block via Toll Operating Transfer (TOT). Additionally, the pace of project award and construction has slowed whilst the pace of asset sales has quickened in order to heal balance sheets.

PLFs both for thermal and renewables are at very moderate levels. Discom balance sheets remain stretched and the receivables position built prior to the new LC mechanism remain at elevated levels causing stress to the power producers. However, there seems to be no incremental build up in the receivables position post the implementation of the LC mechanism.

An update on IBC

The evolving jurisprudence in IBC particularly post the Essar Steel SC verdict strengthens the hands of lenders, due to detailing of the payments waterfall and going ahead, other cases are expected to be settled accordingly.

Source: RBI Monetary Policy & ABSLAMC Internal Research

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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