As someone who has more than 21 years in the financial services space, Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund, has been there and done that when it comes to debt markets. With the repo rate trending towards the 5% mark, there will be ramifications for the debt market. But will low lending rates only be enough for the sputtering economy? We sought out Nagarajan’s views on the state of the economy, debt mutual funds and NBFC funding . He expects the government to look at providing some fiscal stimulus as GDP growth rate has been downgraded from 7.4% in February policy to 6.9 % in the recent policy. “We don’t think the government will allow GDP growth to go down further which may force the government to go for fiscal stimulus,” he tells Kumar Shankar Roy of RupeeIQ in an interview. Read on.
The RBI has already cut interest rates by 110 bps. How has this affected debt MFs?
The RBI has cut interest rates as CPI (Consumer Price Index) inflation continues to be below 4% levels and the GDP growth is slowing down. The government securities market has been ahead of RBI in terms of anticipating repo rate cuts and 10-year government securities yields have already fallen by 100 basis points.
PSU bonds have rallied by 70 to 80 basis points but private sector corporate bond rally has been shallow. Most mutual funds are heavy in PSU (Public Sector Undertaking) bonds and government securities for the last three months which has allowed investors to take the benefit of fall in yields.
Some say rates may be cut even further. How is the debt market expected to behave in that backdrop?
Incrementally the benefit of rate cuts will diminish, even though we expect the terminal repo rates to be in the 5% or below. More important to the market will be to keep the liquidity in the system positive for transmission of rate cuts into lending rates and lower yields for corporate bonds. We expect the government to look at providing some fiscal stimulus as GDP growth rate has been downgraded from 7.4% in February policy to 6.9% in the recent policy.
We don’t think the government will allow GDP growth to go down further which may force the government to go for fiscal stimulus. The compensating factor is global growth is weak due to geopolitical problems and chances of recessionary conditions in the US is increasing which may force the Federal Reserve to go for higher rate cuts.
How are you approaching the NBFC papers in the backdrop of recent events?
We are cautious on NBFCs who have a wholesale book. We are only lending to NBFCs who have strong parentage and whose book is predominately retail.
There has been a hue and cry about sovereign bond issuance overseas. Will it really impact the domestic debt market in terms of relief for private-sector issuers if the size of the overseas bond issue is $10 billion?
The amount which the government plans to raise in the offshore market is Rs 70,000 crore, which is 10% of the total government borrowing for the current financial year. This will remove the pressure on the supply of government papers in the domestic markets. It will also create a benchmark based on which Indian corporates will borrow from the overseas markets.
Rating agencies have come under scrutiny after recent defaults. How do you as a fund manager completely remove the subconscious effect of knowing the rating of a debt security for your funds?
We do not depend on ratings when we do our investments analysis. This is used as a filter, we have got our own internal model for analyzing the companies based on which we take our investment decision. The amount and tenor to invest in the company is based on credit score which we get after doing our internal analysis.
The expense ratio rationalization exercise in funds has often focussed solely on equity funds. How has that played out on debt mutual funds?
The expense ratio of debt funds is lower than the expense ratio prescribed by SEBI. Most expense ratios in the regular plan are in the range of 40 to 150 basis points depending on the scheme. Based on the efforts which the distributors make, this seems to be reasonable.
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management or RupeeIQ will not be liable in any manner for the consequences of such action taken by you.