• The RBI continues to remain the beacon of hope for the domestic debt markets. The surge in pandemic domestically has also put the markets to believe that the MPC will continue to remain dovish as it would continue to focus on growth and would ignore inflation as a transient phenomenon.
• However, we remain apprehensive of a gradual rate rise as we move through the year. We believe that the markets may stop coat tailing the RBI, and are not ignoring a commodity prices rise induced inflation and a larger borrowing program
• The possibility of a bear flattening of the yield curve exists with long term rates rising lesser than short term rates
• Liquidity being in sustained surplus mode, the extreme short end of the yield curve may remain stable.

Indian markets had a volatile month with reasonable swings on both side and ended with marginal loss for Nifty. Mid and Small cap indices fared far better than Nifty as retail participation in markets as well as expectation of cyclical recovery remains high. This is again quite similar to broader trends across the global markets where recovery is broad based. Among large sectors in market; Metals and Pharma gave a sharp positive returns while many other sectors were negative for the month with Auto, Financials, FMCG, Energy, IT underperforming Nifty. FII flows were negative during the month.

Globally, the equity markets continue to remain in bullish mode as the expectations of economic recovery gets stronger along with the rising pace of vaccination. The economic data flow too has entered an extremely favourable phase as disruption during lockdown has now set into the base year. The US Federal Reserve at its meeting during the month, re-iterated that monetary policies are likely to remain benign despite inflationary expectations. Rising commodity prices is a key reason for worries on inflation front. The key arguments for metals being that USA is likely to emerge as a big incremental consumer as the infrastructure spend starts as per President Biden’s plan. Other variables also being the longer term road map of Electric Vehicles roll out that creates its own demand for commodities like Aluminum and Copper.

Indian economy appears to have got into trouble zone with the second phase of covid spreading widely across states. Quite a few states reacted with policy actions to restrict movements. While these steps were not akin to lockdown but in reality the impact has been felt on mobility and business activities across. A nation-wide lockdown while is not announced but many medical professionals and health experts are advising a lockdown to break the chain of spread. It has been a bad month on news flow front especially on inadequate infrastructure; both physical (beds/oxygen etc) as well as soft (medical professionals being over worked and stretched). On positive front, Government relaxed the process for vaccine supply as well as imports and announced aggressive vaccination targets. Hopefully, over next 6 months, a good 40-50% of population (above age group of 18 years) could get vaccinated if all supply dynamics including logistics play out as expected. We hope the covid spread is contained and neither health nor economy reaches crises zone.

There has been some weakness in the trend of normalization and this would lead to downgrades for economy in Q1 of FY22. The corporate results for Q4FY21 have commenced well with no negative surprises from lenders like Banks and NBFCs on the covid phase 1. The early set of results from other sectors too have been in line with expectations. The result season is likely to stretch longer as regulatory compliance has been extended to June 30th for the Q4FY21 results. Without factoring any major impact of covid phase 2, the key challenge for Corporate profitability for FY22 would arise from the impact of commodity costs as well as normalisation of operating costs (in line with normalisation of economic activities). The commentary from corporates would provide some indications on this front.

Globally, the vaccination roll out has been aggressive and the re-opening of economy is the focus area for financial markets. The markets are not prepared for any fresh clampdowns on economic activities. In India too, we need to monitor the covid spread for it can really push economic recovery by 6-12 months. We hope that virus spread is contained quickly and there is no damage to fundamental recovery in economic activities.

We continue to monitor economic activities and development on covid spread and policy actions. The management commentary associated with Q4FY21 results would provide some data points to track and analyse.

Risk (Uncertainty in Markets) has its own relationship with Returns and there are perhaps two ways to manage such greed and fear phase. Investors with lumpsum investments could have an asset allocation strategy (equity as a % of portfolio) to try and benefit from greed and fear phases. Alternately, the strategy is to really stick to longer term outlook rather than focusing on 1-2 years volatility. For investors with SIP investments however such phases are not so relevant as investor is still in accumulation phase for wealth creation over the 5-7 years. SIP may be a good alternate to avoid the behavioural traps during the extreme phases of markets. We maintain that Investors use SIP as part of core investment philosophy and use the lumpsum route during the extreme phases to top-up on their SIPs during the fearful times amidst the volatility.

For investments in debt oriented products:

• We believe that the investors with a shorter investment horizon may continue investments in ultra-short term and low duration funds
• For a medium to long term investment horizon and with a suitable risk appetite, an allocation to short term fund and dynamic bond fund merits attention.

For investments in equity oriented products:

• Our view is that volatility may continue and SIP may be a good way to increase equity market allocations
• We believe investors with shorter investment horizon and lower risk appetite, may invest in arbitrage fund to hedge against volatility
• Investors looking to invest for a longer period, can consider SIPs or STPs into focused, multicap or balanced funds based on risk appetite.
• Investors looking for a better return opportunity and with a suitable risk appetite, may consider part allocation in the mid cap scheme as well.