In this environment, Saurav Ghosh, Co-Founder of Jiraaf, advises against panic-driven decisions, emphasising that such disruptions are often short-lived.
In an interaction with Kshitij Anand of ETMarkets, he highlights the importance of using fixed income as a strategic cushion, allowing investors to deploy capital into equities during corrections.
Ghosh also outlines how oil prices, inflation, and volatility indicators like VIX should be tracked closely, while advocating a balanced, wait-and-watch approach to navigate near-term risks. Edited excerpts:
Kshitij Anand: We have sort of entered a world where uncertainty has spiked, and history suggests that every time Middle East tensions flare up, markets go risk-off. Is this time structurally different for India, or is it the same old volatility story? What are your views on that?
Saurav Ghosh: Yes, some things are the same as they have been in past years. So obviously, if oil prices go up, India tends to suffer. But this time around, there are a few factors that place India in a different position. One is that India today is the largest driver of oil demand growth, which puts it in a very different position globally. Second, India is no longer just a crude importer but is also one of the refining powerhouses in the world. This means that not only imports are impacted, but there is also an effect on exports. Third, unfortunately for India, access to cheaper Russian oil may be affected. Russia has become the largest supplier of oil to India post-2022, so due to geopolitical reasons and the US trade deal, whether India can continue accessing cheaper oil will be a key question.
Fourth, India has been experiencing very low inflation over the last couple of years, and we have been in a rate-cut environment led by the RBI. All these factors put India in a structurally different place. It will be interesting to see how the next few weeks unfold, whether this turns out to be a temporary shock or leads to sustained higher oil prices.
Kshitij Anand: And how should investors separate geopolitical headlines from actual portfolio risk? What is noise, and what is genuinely market-relevant?
Saurav Ghosh: In many past global events, we have seen that if disruptions are temporary, there is usually a sharp spike in volatility, with markets swinging significantly on both sides. However, after two to four weeks, as events stabilise or subside, markets generally revert to the mean. So, for investors assessing portfolio risk, it is important to wait and watch for a few weeks to determine whether the situation is temporary or more prolonged, as that will influence portfolio performance in the short to medium term.
Secondly, investors should evaluate which parts of their portfolio are exposed to current risks. For instance, in equities, sectors like airlines, paints, tyres, and oil marketing companies may face some pressure due to rising oil prices. On the other hand, gold may perform well, and certain service-oriented or export-driven companies could benefit, especially if the rupee comes under pressure.
So, it is essential to assess portfolio exposure to different risks and determine whether the situation is temporary or sustained, as that will dictate how geopolitical developments impact portfolios. I would advise investors not to panic. Events are evolving quickly, so it is better to adopt a wait-and-watch approach over the next few weeks rather than act impulsively.
Kshitij Anand: In fact, India VIX spiked sharply to around the 17 level. Should investors read this as panic, protection buying, or the beginning of a larger risk cycle? What does history suggest?
Saurav Ghosh: It is still too early to call. What we have seen is that the VIX is on the higher side, but still within a range. It has not spiked to that extent. During COVID, the VIX had gone up to 30. Right now, it is around 17-18, so it is still well within the range. Currently, most of the volatility seems to be driven by institutional investors or companies hedging their oil exposure or overall positions due to the spike in oil prices.
As I mentioned, over the next two to three weeks, if the VIX sustains above 20 for a longer period, that would indicate that larger investors are also taking a view that there is sustained stress in the market. For now, there is nothing to panic about. Investors are largely in a wait-and-watch mode, and things should become clearer over the next few weeks. So, at this stage, nothing very serious, I would say.
Kshitij Anand: Now, let us talk a bit about Brent as well. With Brent around $80 a barrel and tail risks rising, at what oil levels does India’s macro story start getting uncomfortable? And as you rightly pointed out, it could also lead to higher inflation.
Saurav Ghosh: We have seen oil prices in the range of $65 to $70, where India has been quite comfortable. Our current account deficit has been around 1.5-2%, which is manageable. However, for India, every $10 increase in oil prices adds roughly $15 billion to import costs. This, in turn, expands the current account deficit.
If oil prices move to around $85 per barrel, the current account deficit could widen from 1.5% to about 2.5-3%, which is significant. The positive for India is that inflation has been relatively low and the fiscal deficit has been under control. However, as oil prices rise to $85, one of two things will happen, either the government passes on higher prices to consumers, leading to higher inflation, or it absorbs the cost through subsidies, which would strain the fiscal budget.
In both scenarios, there could be pressure on the rupee, which may weaken, potentially making foreign institutional investors jittery and leading to outflows. So, these are key factors to watch. I would say $85 is somewhat uncomfortable but still manageable. However, if oil prices sustain above $100 per barrel, it could become a challenging situation, with inflation rising meaningfully. The only silver lining is that higher inflation could also push up nominal GDP in the current environment.
Kshitij Anand: And when volatility is high, uncertainty rises. Historically, fixed income and bonds have acted as a stabilising layer. How do bonds behave during oil-driven or broader market volatility?
Saurav Ghosh: Bonds have always been considered a relatively boring asset class. But in periods of high volatility, this “boring” nature actually highlights their strength. For instance, when the Nifty fell by around 1.5-2% recently, short-duration or high-quality bonds saw minimal impact. The India 10-year G-Sec moved by just about 5 basis points, which is negligible.
If you are a hold-to-maturity investor, you can continue earning stable returns of around 8-10% without much volatility or stress on your portfolio. Having bonds or fixed income products in your portfolio provides stability, especially in uncertain market conditions like these. Investors in this category truly appreciate their resilience during such times.
Additionally, short-duration and high-quality bonds have largely remained unaffected. For investors, allocating to such instruments can be quite meaningful in managing overall portfolio risk.
Kshitij Anand: Let me also get your perspective on what will work better at this point in time. What type of bond allocation works best in this environment? Is it short duration, dynamic, or high-quality accrual? Where should investors move or focus right now?
Saurav Ghosh: There are a few data points to track. Currently, there is volatility in the environment, and we do not know for sure whether oil prices will sustain at these levels or how they will impact inflation over the next two to three months. So, there are some factors to wait and watch in terms of how fundamentals evolve.
That said, short-duration bonds are my top pick right now. Investors can look at bonds with maturities of around one year to 15 months or even lower. Platforms like Jiraaf offer several such options. The key advantage is that short-duration bonds are least impacted by volatility, inflation, or changes in the interest rate cycle. So, in the current volatile environment, they are the most suitable choice.
Secondly, for long-term investors, given the uncertainty, it is better to stick to high-grade bonds, which offer greater stability. If you have long-term exposure, focus on high-quality instruments.
Another approach is to invest across bonds with different durations. This helps create a staggered maturity profile, allowing you to receive periodic cash flows that can be reinvested based on market conditions at that time. This provides flexibility and can be a useful tactical strategy for interested investors.
Kshitij Anand: And for equity investors, can bonds act as dry powder, allowing them to rebalance into equities once volatility peaks? Also, which sectors could lead once volatility subsides?
Saurav Ghosh: Absolutely. Many smart investors actively manage their portfolios in this way. They often increase exposure to fixed income and bonds when markets are performing well and wait for opportunities like the current one.
For instance, if you have around 30% exposure to bonds, this could be a good time to reduce it to 20% or even 15%, since bonds have remained stable while equity markets have corrected. This can create dry powder to reinvest in equities where valuations may now appear attractive for long-term investors.
So yes, bonds can effectively act as dry powder to help time equity investments better during volatile phases.
From a sectoral perspective, it is still a bit of a wait-and-watch situation. However, sectors benefiting from current oil price trends could see near-term traction. Gold, for instance, has been in a secular bull run for the past couple of years and continues to show strength. There are multiple such pockets that investors can evaluate depending on how the macro environment evolves.
(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)