RBI has room to nudge interest rates lower: Harshad Patil, Tata AIA Life

He says any change in stance from neutral to accommodative from the MPC over the next few monetary policies will act as a catalyst to further improve market sentiments

The muted inflation trajectory will give the MPC the opportunity to nudge interest rates lower, says Harshad Patil, CIO, Tata AIA Life. In an interview with Ashley Coutinho, Patil says any change in stance from neutral to accommodative from the MPC over the next few monetary policies will act as a catalyst to further improve market sentiments. Excerpts: 

How soon do you see stability returning to the debt market?

Overall, we remain constructive on the debt market. There are nascent signs of stabilisation as there is greater confidence that NBFCs would be able to raise liquidity after the issues it faced in the third quarter of FY19. A benign inflation outlook as well as improved macro-economic fundamentals will act as tailwinds to the debt market even as the large supply of government securities in FY20 remains a concern.

What is your view on inflation and the trajectory of interest rates in the year ahead?

The trajectory of CPI inflation would be broadly tracking the RBI’s estimates and hence will be in the RBI’s comfort zone of sub-4 per cent in CY19. While there would be a pick-up expected in food inflation component, going forward, it should be offset to some extent by the downward trajectory of core inflation keeping the overall inflation muted.

We believe that this muted inflation trajectory will give room to the MPC to nudge interest rates lower as well as change the monetary policy stance from neutral to accommodative in subsequent monetary policy reviews. While this offers a dovish backdrop for a rally in the fixed income space, the extent of the same would be capped by the elevated borrowing in government securities in FY20, especially if it is not supported by liberal quantum of open market operations from the Reserve Bank of India.

What are your expectations from the upcoming RBI policy meet?

We believe that the RBI has space to nudge interest rates lower in its first bi-monthly monetary policy review in April and guide for further easing in subsequent monetary policy reviews, especially if the CPI inflation undershoots RBI estimates.  Moreover, any change in stance from neutral to accommodative from the MPC over the next few monetary policies will be a catalyst to further improve market sentiments.

The RBI’s liquidity stance will also be a key variable to monitor as it would provide the fixed income market with cues regarding the quantum of the open market operations (OMOs) in the first half fiscal 2020. The fixed income market would seek support from the sustained OMOs to offset the pressure from the elevated supply of government securities through weekly auctions.

What is your outlook for the equity market?

The volatility in Indian equities is likely to persist for a while longer. The markets will seek further cues from the government’s policies and that could give impetus to the improvement in the investment cycle. While the large caps seem to be fairly valued, there appears to be pockets of value emerging from some mid and small-caps given the sharp correction witnessed in these stocks over the last year or so.

Will money continue to chase select names this year as well?

We believe that the polarisation in Indian equities can continue for a while and remain positive on select ideas in the consumption as well as retail finance space. However, we are actively looking at certain sectors that have seen a correction and offer value like corporate banks, select automobiles, industrials and pharmaceuticals.

Insurers have generally kept away from equities in the past few years. Will the trend continue?  

Over the last few years, the insurance industry has been steadily shifting its product mix towards traditional products as well as protection products which may have led to reduced inflows into equities. We have continued to invest in equities as we have seen steady inflows in our equity funds.

Do you see a sustained recovery in corporate earnings in the coming quarters?

We believe that the Indian economy is recovering on the back of strong macro-fundamentals driven by robust GDP growth, benign inflation, reasonable fiscal deficit and manageable current account deficit. This coupled with sustained reforms momentum will lead to improved corporate earnings in the coming quarters.

Emerging markets took a beating last year. Will this year be better?

While emerging markets witnessed underperformance last year, the trend could reverse. This is because of the growth differentials decisively shifting back in EM's favour, supportive EM Fx backdrop on the back of a long pause in the interest rate hike cycle by the US Federal Reserve as well as attractiveness of relative valuations towards emerging markets.

Indian equities have underperformed the EM equities in the recent past on heightened geopolitical tensions and mixed earnings season. We believe that the Indian equities should also outperform going forward as these events are largely behind us. We have seen significant FPI flows in March that led to strong market performance and expect this trend to continue during the year.