For March, the fund was down INR 4.90% and a steep 4.61% USD-INR depreciation extended the loss to US dollar 9.28%. This performance was exacerbated by harsh RBI actions to write down the Yes Bank Additional Tier 1 bond. The fund had a single lot of this holding, amounting to 3.31% share of assets and this accounted for the largest share of the March loss. The performance was also dragged by sharp credit spread increases for Indiabulls Housing Finance, Steel Authority of India, Shriram Transport Finance and HDFC Bank. Fund performance was supported by stable prices and interest accruals in G-Secs, Cholamandalam Investments and Finance and Mahindra Financial Services.
Indian markets mirrored the global markets with additional idiosyncratic domestic developments. Credit markets took a severe jolt on 6 March, triggered by unexpected move by the Reserve Bank of India (RBI) to place India’s fifth largest private sector bank, Yes Bank, under moratorium. It froze daily withdrawal limits at INR 50000 per depositor, INR 100 billion capital infusion at a steep discount to prevailing net worth by consortium of 8 banks led by State Bank of India and a harsh action to completely write-down the additional Tier 1 bonds worth INR 87 billion by invoking Point of Non-Viability clause under Basel 3 framework. Credit markets felt a second big jolt on 18 March, with the viability of Vodafone Idea coming under threat when the Supreme Court of India came down hard on the wireless telecom companies for sharp cuts in self-assessed Adjusted Gross Revenue (AGR) dues in lieu of an earlier directive for complete payment of AGR tax liabilities. The Court went a step further, whipping the Department of Telecom and the media for indulging in these exercises in gross contempt of court. Markets took a final massive jolt on 25 March with the decision to implement a complete, pan-India lockdown for 21 days. Given the severity of health crisis, this is an admirable policy action, but the impact on market volumes and prices was severe.
The Government and RBI quickly followed up with the first steps of fiscal and monetary stimulus respectively on 26 and 27 March:
These steps, along with relief in global markets drove a meaningful relief rally in the final week of March. However, the extreme early month weakness proved difficult to overcome and the result was a sharp monthly loss. The NIFTY-50 and Nifty-500 fell by 23.2% and 24.2% respectively with all sector indices registering losses. The G-Secs yields on 2-year and 10-year treasuries rallied by 32bps and 23 bps respectively but significantly lower than the 75 bps. cut in policy rates. Credit spreads expanded by 30-35 basis points for AAA/AA rated 5-year bonds reflecting the broader economic concerns. The INR weakened by 4.61% against USD, dragged by heavy outflows by Foreign Portfolio investors sold $7.9 billion in equities and $8.1 billion in debt markets, the highest ever outflows in a single month.
COVID-19 is a health crisis first and the rate of infection spread will remain the single biggest factor at play for financial asset classes in very near term. Relief rallies will occur, but the upside will be capped owing to limited visibility on the breadth and depth of the economic slowdown. This environment restrains us from increasing our risk appetite despite extremely attractive financial opportunities when viewed through the conventional economic lens.
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