Sandeep Bagla, CEO, Trust AMC, says this is not the time to go overboard with banking or NBFC stocks because when yields rise, they will impact the valuation of bonds and slow down the credit demand even further.
A bond trader with expertise in managing market risk, Bagla, who has more than 25 years of experience in financial markets, tells Moneycontrol in an interview that the LIC IPO, which opens for subscription on May 4, is reasonably priced and should get a good response from all quarters. Edited excerpts of the interview:
Do you expect faster policy tightening in India too if macros issues like high inflation persist?
Raising rates is an economic choice. One can ignore inflationary impulses for some time and support growth by keeping monetary conditions easy. The danger of such a policy is that inflationary expectations may set in and one would have to raise rates much higher in order to bring inflation down.
Inflation will continue to remain high due to both global factors like high commodity prices and local factors like wage inflation. One hopes that the RBI prioritises inflation over growth soon and raises rates at a faster clip.
Most US Fed officials remain hawkish and have hinted at about a 50-bps rate hike in the May meeting. What are your expectations and what are key things to watch out for?
My expectations, shaped by large global research houses, are that the US Fed will normalise rates very quickly by at least 200 bps. Mr (Jerome) Powell has declared war on inflation and vowed to bring it under control. In the Fed speech, they are likely to say that they will do whatever it takes to bring inflation down to 2 percent.
Also, the plan and pace of reducing the Fed balance sheet from a humongous $ 9-trillion current level would also be keenly watched out for. The degree and speed of liquidity withdrawal is likely to have an adverse impact on most asset classes.
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Is the LIC initial public offering, the biggest IPO in the history of Indian capital markets, that opens on May 4 reasonably priced? Do you think the issue will get a healthy response?
LIC is a dominant, aggressive market leader and the IPO appears to be priced reasonably. The IPO should attract fairly high interest from all quarters. Mind you, Indian markets have tended to fall after large IPOs in the past. LIC could find takers both from domestic and foreign institutional investors. It is likely to be popular with retail investors as well.
Given the change in the interest-rate environment, is it the time to go big on the banking and financial space?
Banks are pass-through vehicles, which borrow the rough deposits and lend at a spread over the borrowing costs. The level of interest rates really should not matter. What could matter is credit growth which has been sluggish in the past.
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Higher interest rates should result in lower demand for their products, as higher lending yields could dissuade potential borrowers. Hence, no, I don’t think it would be wise to go overboard on the banking or the NBFC sector when yields are rising as it would impact the valuation of the bonds they hold and slow down the credit demand even further.
If the macro issues continue for a couple of quarters, do you think RBI’s full-year growth forecast will hold?
With macro headwinds remaining firm, GDP is likely to slow down. The RBI will revise the GDP estimates with emerging macro data. Economists have brought down their GDP estimates already because of the Ukraine situation, blockages in the global supply chain and a generally unfavourable macro environment.
Also read: Indian economy may take 12 years to recoup pandemic losses, estimates RBI
Do you expect 10-year bond yields to hit the 8 percent mark in the current year itself?
CPI headline inflation is at 6.95 percent, core CPI at 6.4 percent, WPI inflation is at 13 percent plus. It is a surprise why the Indian yields are trading at the current levels. The process of repricing of Indian bonds has started.
If inflation remains close to 6 percent, and it will, investors will demand about 200-250 bps over expected inflation. So, yes, 8 percent is a distinct possibility in the near future.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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