 "We are expecting 25-50 bp interest rate cut in FY17: Pankaj Sharma")
Pankaj Sharma, head of fixed income, DSP BlackRock Mutual Fund, believes that short to medium-term duration bonds will find favour among investors as the Reserve Bank of India continues to focus on liquidity management and real interest rates remain positive. He tells Ashley Coutinho that certain sectors of industry are expected to see improvement in credit quality and rating upgrades. Edited excerpts:
A majority of bankers and economists expect the Reserve Bank of India (RBI) to keep key policy rates on hold in its monetary policy review on Tuesday. What is your take? How do you read the trajectory of interest rates for the rest of FY17?
The monetary policy review in October will be the first one chaired by the new RBI governor and the newly formed Monetary Policy Committee (MPC). Markets are going in with a 50-50 probability of a rate cut. We are looking for 25 basis points (bps) to 50 bp rate cuts over FY17 as consumer inflation improves on the back of food inflation, steady core numbers, implementation of reforms such as goods and services tax (GST) and if the government adheres to its fiscal deficit targets.
The Consumer Price Index (CPI)'s trajectory should continue to trend lower on a good monsoon and government's proactive food price management policies. We expect core inflation to remain sticky around current levels. There are some risks to the upside to CPI from GST implementation and impact of the Seventh Pay Commission's award on house rent. Overall, we expect CPI to undershoot RBI March-end CPI target marginally.
Do you see the rupee strengthening?
India continues to see stable current account deficit (CAD) of one per cent of gross domestic product (GDP) with strong inflow on account of foreign institutional investors (FII) and foreign direct investment (FDI) flows. A decline in global commodity prices and consequent improvement in terms of trade has lent support towards narrowing CAD given India's position as a net commodity importer. The capital account surplus was led by portfolio capital inflows and net FDI flows. RBI continues to smoothen market volatility. Hence, we see the rupee in a stable regime and range-bound.
It is believed that short-term bonds will start doing well. Could you explain which debt categories will do well in the coming months, especially if interest rates fall?
Bonds have done well in FY17 as RBI focuses on interest rate transmission into the banking system by moving rupee liquidity to neutral/positive from deficit in FY16. We continue to believe that short to medium-term bonds will find favour among investors as RBI continues to focus on liquidity management and real interest rates remain positive.
In the year till August, FIIs have sold debt papers worth about $1.2 billion (Rs 7,984.8 crore). Do you see selling to continue? What impact will outflows in corporate bonds due to maturing of foreign currency non-resident (bank) (FCNR-B) deposits in September-November have?
While FIIs have been sellers till August, we saw the trend change in September with net purchases of $2.35 billion (Rs 15,637 crore) till the 28th and cumulative purchases have turned positive for the year at $880 million (Rs 5,855 crore). There is strong demand for Indian debt securities, as is evident from India listed bonds and masala (rupee) bonds. We don't think there will be much impact of FCNR (B) outflows on corporate bonds. RBI has been pro-active on liquidity and with forex reserves at an all-time high, we expect redemptions to go smoothly.
Considering last year's Amtek Auto episode, what is your fund house's strategy on credit calls? Do you expect credit upgrades and is it a good time to go down the credit curve?
For every credit that is bought by DSP BlackRock's funds, a detailed internal credit analysis of the issuer is undertaken. This includes a thorough analysis of the business, financials, undertaking management meetings, branch visits and talking to various third parties for due-diligence. We also do a thorough check for management quality and corporate governance. For all lower rated credits (AA- and below), issuers are monitored and management meetings held frequently.
With a good monsoon and an improvement in domestic demand, certain sectors of industry are expected to see improvement in credit quality and rating upgrades.
A majority of bankers and economists expect the Reserve Bank of India (RBI) to keep key policy rates on hold in its monetary policy review on Tuesday. What is your take? How do you read the trajectory of interest rates for the rest of FY17?
The monetary policy review in October will be the first one chaired by the new RBI governor and the newly formed Monetary Policy Committee (MPC). Markets are going in with a 50-50 probability of a rate cut. We are looking for 25 basis points (bps) to 50 bp rate cuts over FY17 as consumer inflation improves on the back of food inflation, steady core numbers, implementation of reforms such as goods and services tax (GST) and if the government adheres to its fiscal deficit targets.
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Indian consumer inflation fell to a five-month low in August. Do you see inflationary pressures easing in the coming weeks/months?
The Consumer Price Index (CPI)'s trajectory should continue to trend lower on a good monsoon and government's proactive food price management policies. We expect core inflation to remain sticky around current levels. There are some risks to the upside to CPI from GST implementation and impact of the Seventh Pay Commission's award on house rent. Overall, we expect CPI to undershoot RBI March-end CPI target marginally.
Do you see the rupee strengthening?
India continues to see stable current account deficit (CAD) of one per cent of gross domestic product (GDP) with strong inflow on account of foreign institutional investors (FII) and foreign direct investment (FDI) flows. A decline in global commodity prices and consequent improvement in terms of trade has lent support towards narrowing CAD given India's position as a net commodity importer. The capital account surplus was led by portfolio capital inflows and net FDI flows. RBI continues to smoothen market volatility. Hence, we see the rupee in a stable regime and range-bound.
It is believed that short-term bonds will start doing well. Could you explain which debt categories will do well in the coming months, especially if interest rates fall?
Bonds have done well in FY17 as RBI focuses on interest rate transmission into the banking system by moving rupee liquidity to neutral/positive from deficit in FY16. We continue to believe that short to medium-term bonds will find favour among investors as RBI continues to focus on liquidity management and real interest rates remain positive.
In the year till August, FIIs have sold debt papers worth about $1.2 billion (Rs 7,984.8 crore). Do you see selling to continue? What impact will outflows in corporate bonds due to maturing of foreign currency non-resident (bank) (FCNR-B) deposits in September-November have?
While FIIs have been sellers till August, we saw the trend change in September with net purchases of $2.35 billion (Rs 15,637 crore) till the 28th and cumulative purchases have turned positive for the year at $880 million (Rs 5,855 crore). There is strong demand for Indian debt securities, as is evident from India listed bonds and masala (rupee) bonds. We don't think there will be much impact of FCNR (B) outflows on corporate bonds. RBI has been pro-active on liquidity and with forex reserves at an all-time high, we expect redemptions to go smoothly.
Considering last year's Amtek Auto episode, what is your fund house's strategy on credit calls? Do you expect credit upgrades and is it a good time to go down the credit curve?
For every credit that is bought by DSP BlackRock's funds, a detailed internal credit analysis of the issuer is undertaken. This includes a thorough analysis of the business, financials, undertaking management meetings, branch visits and talking to various third parties for due-diligence. We also do a thorough check for management quality and corporate governance. For all lower rated credits (AA- and below), issuers are monitored and management meetings held frequently.
With a good monsoon and an improvement in domestic demand, certain sectors of industry are expected to see improvement in credit quality and rating upgrades.