Fixed income market has got its full energy back on account of few things, one is oil price coming off globally and even the outlook for oil price is weak.
Expectation of a policy rate cut remains and could vary in the range of 25-50 basis points for this financial year, says A Balasubramanian, CEO of Aditya Birla Sun Life AMC. In an interview with Chirag Madia, he also says the cycle of rotation of money, which got broken during August-September period last year, has not fully returned. Excerpts…
What is your view on debt markets and interest rates in India?
Fixed income market has got its full energy back on account of few things, one is oil price coming off globally and even the outlook for oil price is weak. FPI flows have been rising, consequently helping RBI to inject liquidity in the system through dollar swaps. The central bank has also introduced voluntary retention route under which dollar forward swap is provided. RBI has been doing a series of VRR schemes under which they are getting money and due to it, balance of payments is also showing improvement. Domestic inflation also remains stable and is not showing signs of increase. However, we have to wait and see the impact of monsoon on the agriculture sector and prices of food grains. Slowdown in growth, especially in automobile sector truly reflects weakness in overall growth momentum. So, keeping these factors in mind, expectation of a policy rate cut remains. It could vary from 25-50 basis points for the whole financial year. Liquidity in the system is getting better, and as a result, calm is returning in credit market.
What are your views on the RBI policy?
We may expect a 25-basis-point rate cut in the June policy. RBI may also look at providing some liquidity support to NBFC market, by relaxing some LCR norms. They might also consider some kind of refinancing window with 1% for SLR and that could be kept aside for proving liquidity for some of the NBFCs. This could lead to their cost of borrowings coming down a bit. Their concern would be the slowdown in the economy we have seen in the last four-five months. I think if lending rates come down, it can lead to sentiment pick up. Lending rates in the last one year has gone up because entire credit pricing has changed post NBFC crisis. One can argue that, now credit is priced properly. Ultimately, a reduction in interest rates has to result in transmission of rates to a large pool of borrowers.
What is the biggest concern in debt market?
Currently, the concern is about markets missing liquidity rotation in the banking system. The financial market is not only about rates and liquidity, it is also about rotation of money. This cycle of rotation of money which got broken during August-September period last year has not come back fully. Rotation of money going up means confidence has to go up, and it has to be driven by some players in the industry. In my view that confidence can be driven by the banks. Mutual funds have short term money, banks can take a lead in driving the confidence. It can be driven by some policy changes like liquidity window by RBI, even good NBFCs can borrow money from banks. I would like to say that, banks being mother of financial sector, it has to have confidence in the subset of the sector that is NBFC.
What are your views on loan against shares (LAS) and how should it be used in the mutual fund industry?
Investment in debt securities in the nature of LAS is not new to MF industry. This industry has been investing in such securities for the last 20 years. Most of the promoters who pump money into business expansion mostly use this route of borrowing and invest in various projects as part of the promoter companies participation. Pledging of securities in the stock market is done with an intention to use it for fulfilling the margin needs. We also need to accept that in the last three years credit markets have been growing and mutual funds have been predominantly building this space as a contributor to the bond market development. MFs will continue to selectively look at such trades from these funds. However, it may have to decide how much exposure one should take. One should also take a measured risk in the form of defining margin cover, time frame of such investment, percentage of company outstanding pledged, as well as promoter, among other things. With the recent experience on such investment, industry has to bring in new perspective to this instrument on the basis of recent learning.
Do you think NBFC crises is over? What lessons can be learnt by the mutual fund industry?
I think the worst is subsiding as time progresses for the large borrowers. Money is available at a reasonable cost for well rated borrowers. At the same time, few players continue to face tough time given their large book size and asset liability mismatch. Series of downgrades too have reduced the ability to raise funds from the market. Lesson for the industry is more about how much exposure one can take into the sectors which are leveraged. We must also ask, how much exposure can be taken in the low rated instruments. Such investments have to be looked from the angle of risk appetite. Risk tolerance levels also need to be put in place both at portfolio and investor level.
We have seen some problems around the fixed maturity plans (FMPs), do you think industry mis-sold FMPs to the investors?
I don’t think industry mis-sold FMPs, it is a three year lock-in period product and it is a pass through vehicle. Yes some problems have happened in the credit related FMPs, but in the past few years investors have invested in these products for predictable higher return with lowest possible expenses. All mutual funds are pass through vehicles. The issue that has happened in FMPs or credit funds are those that are meant to be investing in less than AAA or AA papers. Recovery rate in fixed income is faster depending on how much is the accrual in the portfolio. Investors should not panic and need to stay calm. One needs to be a little tolerant at such times and give investments some time to deliver desired returns, and also recover any possible reduction in it.