We see rupee devaluing as exports become priority: JM Financial's Manglunia

Manglunia tells Puneet Wadhwa that based on risk appetite, there is a lot of value in select names in 'AA' category and below, which offer excellent carry even in the face of threat of rising rates

The US Federal Reserve (US Fed) hinting at the possibility of tapering its bond buying and hiking interest rates earlier than expected unnerved global financial markets recently. AJAY MANGLUNIA, managing director and head of institutional fixed income at JM Financial, tells Puneet Wadhwa in an interview that based on risk appetite, there is a lot of value in select names in ‘AA’ category and below, which offer excellent carry even in the face of threat of rising rates. Edited excerpts:

The US Fed has unnerved global financial markets. Are they worrying too much?

The US Fed has laid stress on inflation being transitory and that it will not raise interest rates preemptively based on inflation fears. Even though some discussions on tapering have been initiated, the Fed has tried to calm the markets. Any tapering seems at least a year away, and, unlike 2013, broad-based growth is a clear priority over inflation fears.

Do you see more outflows from the debt category?

India will continue to provide attractive spreads vis-à-vis macros. Inclusion in global indices will give a major fillip to incremental flows of debt capital into India. Domestically, factors like low yields in traditional savings like fixed deposits, underpenetrated insurance and mutual fund (MF) space will keep flows in debt category robust. Even banks with steady deposit mobilisation and lacklustre credit disbursement point to a steady appetite for bonds. In terms of yields, the Reserve Bank of India (RBI) is likely to continue with its support measures till growth is back firmly, which will ensure a narrow corridor for rates.

What measures do you expect from RBI over the next few months?

RBI will continue to support the markets with all instruments at its disposal. Economic revival has probably been delayed at least by a quarter or two because of the second wave, which will necessitate continued support for at least the whole of financial year 2021-22 (FY22. Growth forecasts are unlikely to be reviewed down as most of the data point to continued recovery probably stretched across next two quarters as pace of vaccinations improves.

How should bond investors approach the debt markets?

Based on risk appetite, there is a lot of value in select names in the ‘AA’ category and below, which offer excellent carry even with the threat of rising rates. The yield curve also remains very steep with the 10-year benchmark being an exception, thereby, throwing up interesting opportunities.

Do you see more pressure on the rupee over the next few months in case foreign flows reverse?

In the post-Covid world, Indian economy is likely to play a larger role as a manufacturing hub and accordingly will keep attracting foreign capital. Even if rates in the US rise, healthy dollar reserves coupled with likely RBI efforts to stabilise the rupee and safeguard it against import-driven inflation will keep it stable in the short to medium term. Probably in the slightly longer term as the economy gathers steam, we will see the rupee devaluing as exports become a priority.

Will the debt markets be able to absorb the government’s borrowing programme for FY22?

We think RBI will continue to fully support the markets the way it did in FY21 to ensure that the borrowing goes smoothly in FY22. Typical measures like open market operations and Government Securities Acquisition Programme have ensured that borrowing has been largely smooth.

Many experts say the current inflation surge is transitory. Are markets in for a rude shock?

If we look at what happened during the same period last year, inflation inched up quite a bit between May and November in absolute terms, majorly due to lockdown-induced supply pressures and pent-up demand to some extent. One thing to note is that the second wave has been brutal in terms of impact, but shorter in duration, which will ensure shorter disruptions in supply while having almost a similar impact on demand dynamics. Therefore, we think the inflation numbers will be within RBI’s tolerance levels, albeit at the higher end of the scale.