• If the factors supporting India’s cyclical rebound come to fruition, a lot of
macro-economic headaches feared at the beginning of the year will ease.
Thus some of the fiscal inflexibilities and associated risks of sovereign
rating downgrades will abate, the external account will build even further
buffers as capital flows remain strong, and hopefully India’s appeal will
percolate to global fixed income investors as well.
• Monetary policy will gradually move from the level of emergency level
accommodation today to one of still high accommodation. This will likely
be a slow process and will involve more discretionary adjustments to the
price of liquidity rather than the quantity of it.
• Yield curves will gradually bear flatten. It is very likely that the bulk of this
adjustment will be made by the very front end rates. This is not to say that
long end rates won’t have to adjust. Rather, the quantum of adjustment
there may be of a relatively smaller magnitude when compared with rates
at the very front end.
• The starting point today is one of a very steep yield curve. Thus unlike in
normal times when the yield curve is quite flat, the decision on duration
isn’t a binary one any more. Rather, one has to examine the steepness of
the curve and position at points where the carry adjusted for duration
seems to be the most optimal.
• Credit spreads, including on lower rated assets, have compressed
meaningfully. These reflect the chase for ‘carry’ in an environment of
abundant liquidity and funds flow, as well as the relatively muted supply of
paper as companies have belt tightened and focused on cash generation.
As activity resumes over the year ahead, issuances will likely increase
thereby pressuring spreads to rise.