To ensure debt sustainability in the global context, more fiscal and structural measures are required, says Namdev Chougule, head – fixed income, JP Morgan Asset Management, in an interview with Puneet Wadhwa. Edited excerpts:
Do you think the recent repo rate cut by the Reserve Bank of India (RBI) has merely boosted sentiment or does the domestic macro-economic condition actually support such a step?
We feel the recent repo rate cut by RBI was in the backdrop of fall in non-food manufacturing inflation and increasing growth concerns.
Although the central bank has mentioned that upside risk to inflation remains due to higher crude oil prices and the pass-through effect on domestic inflation, pricing power of companies remains restricted in the economy. The economy is operating below its post-crisis trend and the growth-inflation dynamics are favouring growth.
Given the government’s borrowing plan, inflation and the widening current account deficit, how much room does RBI have to cut rates? Have you changed your estimates on the quantum of cut for FY13, given the recent developments?
According to our estimates, the GDP growth trend rate is likely to be lower than the pre-crisis peak. If RBI stabilises growth around its post-crisis trend, then the headroom for further rate action is limited.
Given the strong headwinds to growth, both domestically and globally, we feel risk to GDP growth at sub trend level for FY2013. Thus, even as inflation risk persists, it is unlikely to spread into generalised inflation as the pricing power of companies remains restricted.
Going forward, we think a further rate cut cannot be ruled out completely but RBI would continue to surprise the market with its timing and magnitude, depending on economic data.
How do you see the rupee and bond yields in the near to medium term?
Higher import bill due to rising crude and other commodity prices raises concern on funding of the current account deficit (CAD) and balance of payments (BoP) risk. The rupee is likely to trade weak as capital flows remain weak and is unable to finance the current account deficit. Bond yields are likely to remain in a range, amid continuous supply.
We expect government bond yields to trade lower over the period of the next quarter, as RBI’s commitment to maintain comfortable systemic liquidity condition may support deposit growth in the banking system and maintain demand for G-secs. Bond yields have more downside from these levels, as net supply remains low in April and May due to redemption.
What is your investment strategy at the current levels? Is it time to rejig portfolio and benefit from the high interest rates?
Our strategy on fixed income portfolios is to increase the duration of the fund in a scenario where bond yields are likely to trend downward and liquidity condition remains supportive. We had adopted an accrual strategy until recent times and are now moving to a mix of accrual and duration. We believe the stance taken by RBI in terms of supporting growth could lead to a rally in the long end of the market and we could potentially benefit from such a move.
Global markets have reacted positively to the response given to the Spanish bond auctions. Are there any more surprises left as far as the euro zone / PIIGS nations are concerned?
Although the recent auctions for Spanish bonds gave some positive boost to the global markets, we feel there could be more surprises in the euro zone. To ensure debt sustainability, more fiscal and structural measures are required. We expect Spain to take support from a Troika programme sometime in this year.
How optimistic are you, given the recent economic data from the US and China? How stable is the macro-economic recovery in these two nations?
The economic activity in the US appears to have advanced at a slightly better-than-expected pace since the start of the year. But with higher inventories and modest demand, we expect Q2 to be a slower quarter. A better employment rate and policy support from the US Federal Reserve reduces the negative impact on recovery.
The Chinese economy grew by 8.1 per cent year-on-year (y-o-y) in Q1, compared to 8.9 per cent y-o-y in Q4 of 2011. Weaker demand on both domestic as well as external fronts and a slowdown in investment and consumption contributed to slower growth. China has eased monetary policies recently and further fiscal support is likely to give a boost to economic activity in the next two–three quarters.