IDFC First bank is an Indian Banking Company with headquarters in Mumbai that forms a part of IDFC, an integrated infrastructure finance company. IDFC asset management company has warned investors that financial repression may actually get worse in the post covid-19. The Financial repression describes measures by which the government channel funds from the private sector to themselves as a form of debt reduction. This seems to be a policy driven by suppression of real interest rates in order to benefit borrowers and stimulate the economy. IDFC has layed down a road map for living through financial repression.
The economic damage caused by covid-19 in India and all over the world has led to some of the changes in the financial situation. Indian savers should accept the reality of low yields for relatively safe paper. This could be short dated government securities which minimize both duration and credit risk.
Financial repression is happening across the world including the US. The federal reserve has been witnessing an ever increase in the fiscal package and new public debts are being created.
Suyash Choudhary, head of AMC’s Fixed income said that the repression can last only for the short term. This is because India does not print the world’s reserve currency (US Dollar) and because India’s current account deficit (CAD), which Is cyclically depressed will come back when the growth starts to revive.
The Indian debt market has steep yield curves and higher credit spreads. A steep yield curves means that effectively high interest rates are offered for longer-dated debt. This is to compensate savers for the uncertainty of government financing longer dated papers. A credit spread means that debt paper from lower credit quality borrowers pays higher yields than paper from high credit quality borrowers. These spreads compensate savers for the higher risk they take on, when they put money in riskier paper.
With such a lot of uncertainities during the covid 19 pandemic in financial arena, the investors must always to stick to invest in the highest credit quality segments. Investors with a view that rates may go lower may add duration to part of their investment portfolio in anticipation of higher returns via capital gains.
Investments in lower credit papers are prone to sudden illiquidity and may hence end up trapping investors. Therefore, the investors must see to that they concentrate more on the safety than the higher interest rates during this pandemic.