Debt Markets– An Opportunity

Global Scenario

Risk aversions due to banking crisis is resulting in withdrawal of money from equities and other risk assets across the globe

Central Banks are pumping up liquidity and cutting interest rates, but not achieving desired results because of extreme risk aversion

Central Banks may have to cut interest rates to zero or near zero level to induce risk taking

Globally Declining Rates

US, Japan, U.K, Euro Zone are all cutting rates and
pumping liquidity to keep their economy from sinking

Indian Context

Inflation has started declining rapidly

RBI is keeping adequate liquidity

RBI is cutting interest rates

Election bound government will follow loose monetary policy to support growth

Further policy action in line with global markets and local conditions will be most probably on the softer side

All Components of WPI are also falling

CRR is being Cut

Repo rate is cut

Growth is softening

RBI have revised downwards Real GDP Growth target for FY 09 from 8 % plus to 7.5-8 %

CMIE have revised downwards Real GDP Growth target for FY 09 from 9.5 % to 8.2 %

Citigroup , Morgan Stanley and other analysts are now estimating FY 09 Real GDP growth between 6-7 % vs earlier estimate of 8-9 %.

The RBI will be now biased towards supporting growth

Gilt Yields have declined rapidly

But Corporate and PSU Bond Yields have not followed

10 year Bond Spread is at high level

Spread Contraction can happen
We expect Policy stance to be biased towards Pro Growth and on the softer side

PF Trusts post SDS interest payment in Jan 09 will invest in PSU Bonds

Low leverage of Indian Corporates Keep default risk under check

Borrowing rate needs to be reduced for revival of corporate sector and GDP growth in India like in other parts of the world

Summary

We expect Interest rates to decline globally

We expect Interest rates to decline in India

We expect Higher Rated PSU Bonds and Corporate Bond spreads to decline

Income Funds provide an excellent opportunity to capture this trend