Vinay Pai, Head-Fixed Income, Equirus Capital, says that the economic growth recovery is stable, but it may get hampered if any tightening measures are put in place.
Pai has over 28 years of rich experience in the Financial Services industry and specialises in Fixed Income Markets, Intermediation, Origination, and Distribution. Prior to Equirus, he was associated with Edelweiss.
In an interview with Moneycontrol’s Kshitij Anand, Pai said that while there would be concerns on the rising yields in the bond market, with the ample liquidity and growth rebound equity as an asset class would outperform for the next fiscal i.e. 2022.
edited excerpts:
Q) What is your take on the MPC committee decision of the April meeting as well as future outlook?
A) Despite the large-scale vaccination drive, new COVID-19 variants are spelling another trigger for concern forcing a few nations to go in for a second round of lockdowns.
While emerging markets like India are better poised with a reasonable uptick in growth, the IIP number reflects slack in activities in manufacturing and mining.
The Union Budget 21-22 had put an impetus on the infrastructure and health and housing sector which combined with abundant liquidity globally is well poised to grow in the second and third quarter of this fiscal.
While Inflation has been on an elevated level and over the threshold of 6%, above the comfort of the regulator, is mainly due to supply-side and logistic concerns on manufacturing activities adding to which crude prices spiked over 50% in the last 6 months on the back of production cut from OPEC, and the crude has touched a peak of 71.38.
Considering the above aspects and previous guidance MPC maintained its stand leaving the policy rates Repo rate at 4.00 % and Reverse Repo at 3.35%, providing an accommodative stance.
MPC will provide more impetus on growth over inflation currently, while its long-term Inflation target remains intact.
Q) Archegos fire sale does remind us that we still live in a world that is vulnerable to external shocks. Top global banks such as Credit Suisse and Nomura have been burned in the fire sale and stand to lose close to $ 6 bn. What impact the event could have on Indian markets and offshore derivative instruments?
A) While India is equally vulnerable to every global shock but the recent event has had negligible aftermath. Good regulatory overview and robust risk management in Indian bourses exchanges unlikely to have impact.
New Peak Margining obligation has been implemented in phases of which 25 percent has been implemented and balance 75 percent implementation is spread over 3 quarters of 25 percent each. This will result in lesser shocks in terms of defaults.
Q) What is the kind of impact you foresee on Indian markets post the announcement of a multi trillion-dollar plan to rebuild America’s infrastructure by US President Joe Biden?
A) The $ 2 Trillion Infrastructure plan spread over 8 years will provide jobs and revive the American economy. Many global companies including Indian companies will look to participate in the infrastructure development and benefit directly and indirectly.
However, the questions would arise on how the Biden administration would implement an increase in corporate taxes and the impact on current taxes and corporate growth, will it remain a debt for a longer time.
Secondly, will the US administration put an indirect embargo on the tender eligibility to non -American companies which will unfold shortly.
Q) Equity markets closed FY21 with gains of 70% but it happened on a small base amid the selloff seen in March 2020 due to the outbreak of COVID. What is your outlook on markets for FY22? Which asset class could outperform?
A) While there would be concerns on the rising yields in the bond market, with ample liquidity and growth rebound equity as an asset class would outperform for the next fiscal i.e 2022.
Q) FTSE Russell, a global index service provider, placed Indian government securities on its watch list for inclusion in its emerging markets government bond index. What is the kind of money which could come in from foreign investors?
A) The current FPI limit utilisation limit is slightly over 32% of the overall allocated limits of Rs 3.38 trillion and just over 1.59% of the GOI outstanding which is Rs 71.68 trillion.
India has been looking to have its bonds on global indices over some time now, inclusion of GOI in the FTSE Russell Emerging Market Bond Index will attract more allocation by the FPI towards GOI bonds.
While the government needs a spell of at least another 5 years, a plan on taxation on the Foreign Investment in India and a stable market regulatory environment, will add confidence to the new FPIs.
While APAC enjoys 70% weightage, BBB ratings which currently India falls in currently weigh 22%. Other considerations like Market Regulatory Environment, Clearing & Settlement, Custody Ratings, etc, Minimum outstanding Eligible bonds should be $ 10 Billion.
Considering such factors India will probably attract $ 10-12 billion FPI flows, while global experts who have been following and investing in such Index have estimated that India is likely to receive $ 10 billion.
Q) We closed March on a flat-to-positive note. How is April likely to pan out for investors? Any big events to track which could have a bearing?
A) A 27% hike in GST collection is a significant number although the data is not fully comparable due to the recent announcement of lockdowns.
This is a positive number with effective tax administration and an uptick of GDP. If the collection number rises similarly it would have bearing on government borrowing.
So the question would be, will they contain the borrowing with good growth in tax collection? While the front-loaded 60% of the borrowing programme in the first half sends the yields in the upward trajectory unless it is managed with effective OMO at the right time combined with a stable currency.
Q) Dollar near five-month higher while US Bond Yields inch higher. What is the kind of impact you foresee on commodities? And impact on commodity-linked stocks/sectors?
A) With a rise in crude price over 50% in the last 6 month and slack in manufacturing output, logistic issues sent inflation spiralling in many commodities.
This may gradually reduce on the back of the intense vaccination drive, commodities prices are likely to be moderate by next quarter. Steel and other metals may still see robust demand due to infra & housing demand.
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