RBI has space for more rate cuts: Aditya Birla Sun Life AMC's Maneesh Dangi

The present NBFC crisis could spread to other segments and prolong, if not contained by sensible policy intervention, says Dangi

The present non-bank financial corporation (NBFC) crisis could spread to other segments and prolong, if not contained by sensible policy intervention, says Maneesh Dangi, chief investment officer-fixed income, Aditya Birla Sun Life AMC. In an interview with Ashley Coutinho, he says the crunch in liquidity might continue to be felt by those who need it the most in the next few quarters. Edited excerpts:

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

The perception that there might be disorderly liquidation of some of the larger NBFC borrowers has got markets spooked. The size of some of these balance sheets would suggest a catastrophic outcome if these were to be liquidated in a disorderly fashion. I believe the government was cognizant of this risk when it assumed control of IL&FS and its subsidiaries. 

In a sense, it had got to a point where there was a lack of confidence in its previous management and their ability to navigate the stress from that point.

Since then, a couple more NBFCs have defaulted. Markets, being markets, have begun to extrapolate this problem to not only many other NBFCs but also other industries. While I do not think there is a fundamental problem across the board, the contagion could spread to other segments, and be more prolonged, if not contained by sensible policy level intervention.

How are fund houses tightening the process of assessing credit and default risks in the current environment?

Fund houses have tightened lending standards. A generalised tightening is also constraining all sorts of financing. As far as credit ratings are concerned, funds also rely on their own credit research and access to market information. Many of the fallen AAAs were always priced as AA or As even before tight liquidity and a weak macro environment led to significant deterioration in their creditworthiness.

All ratings have two components. One is the inherent profitability, leverage level and soundness of the balance sheet being rated. Second, the implied support from some other group or promoter company, either explicit or implied. 

The uncertainty regarding the second aspect is something our industry and rating agencies will have to live with for a long time post this crisis, and will have to accordingly evaluate, rate and price risk better.

Maneesh Dangi, chief investment officer-fixed income, Aditya Birla Sun Life AMC

What are some of the lessons from recent events?

One is that NBFCs are prone to boom/bust cycles and tight liquidity/rate cycles can be devastating for the more leveraged ones. Also, that these NBFCs have separate balance sheets but macro cycles tie them intimately. Therefore, our exposures to NBFCs/HFCs (housing finance corporations) have to be a lot lower as a sector from its current level.

How long do you expect the pressure on liquidity to continue?

The recent liquidity tightness had two elements -- systemic and sectoral. Systemic liquidity tightness was largely due to high cash leakage, as well as government going slow on expenditure due to elections. This set of liquidity has eased recently, owing to the Reserve Bank's (RBI's) measures like open market operations and FX (foreign exchange) swaps, pick-up in foreign capital inflows and an end to election-related cash leakage. However, despite easing of systemic liquidity, flow of funds remain constrained for NBFCs/HFCs and, thereby, real estate developers.

So, the issue now is not of systemic liquidity deficit but sectoral liquidity constraints because of market risk perception for certain sectors. Given that our policy makers don’t want to indulge in the moral hazard to back-stop these franchises, the only solution to stop contagion is to supply enormous liquidity to the banking system by way of OMOs (open market operations) and forex swaps. It’s very likely that liquidity will stay plentiful in the coming quarters but its availability will remain constrained for the ones who need it the most.

We have seen three rate cuts this year. What is your reading of the interest rate trajectory?

The economy has been on a weakening trend from the beginning of the NBFC crisis since September. In the past six months, we have seen all the sectors of the economy, the consumer segment in particular, showing a slowing trend. While a part of it can be attributed to pre-election tentativeness, most of it is either due to consumer-NBFC channels being frozen and the Pay Commission-induced boost wearing off. At the same time, we have seen global growth slowdown happening, both on the consumer front and due to the China-US trade tension. These factors are powerful and would require external stimulus from RBI/government to reverse itself.

We have seen the limitation of fiscal measures. It has resulted in crowding out of corporate borrowing, resulting in real rates remaining high for the corporate sector. High real rates have taken a toll on the economy over a period of time. Given that inflation is broadly contained, the central bank could look at providing stimulus to the economy through further rate cuts.

Where do you see inflation moving in the near future?

In the past three years, we have seen inflation staying near and/or breaching the lower end of RBI’s range of two to six per cent. The chief reason has been unprecedented fall in food inflation. As food inflation has remained so low for so long, we can expect it to creep up over the next few months. At the same time, we had seen core inflation going up due to various idiosyncratic factors in the past one and a half years. Some of the factors were either cyclical and one-offs. That, combined with a weak growth environment and lower global commodity prices, would result in sharply lower core inflation. Therefore, we expect both food and core inflation to converge to around four per cent by the end of the year.