ET BureauThough the Budget is a balanced one and the credit environment is positive, concerns remain over issues like rising NPAs in the banking system, says Santosh Kamath in an interview with ET.
Did the Budget do enough to remove concerns surrounding the economy?
The revised fiscal consolidation roadmap will help the government fund infrastructure investment, which has become a focus area, even though it may lead to slight upward pressure on bond yields in the near term. The government’s assertion that it will be able to meet the challenging estimate of a fiscal deficit of 4.1% in FY15 is a big positive. Meanwhile, a lower than expected government borrowing will help the private sector to participate more in raising credit. Overall, the budget was a balanced one for the debt markets.
Has the immediate rate cut by RBI come as a surprise? Do you expect further cuts in the coming months?
Yes, the rate cut was a surprise. While easing room still exists, we think the RBI will wait and watch for some time to see the lagged impact of the last two cuts, before taking further policy action.
Are you comfortable with how the broader economy is placed?
All macroeconomic indicators are looking much better now than they were a year back. Inflation has come down sharply over the past few months, so has the current account deficit. Forex reserves have shot up. Commodity prices have softened quite a bit. To that extent, the economy seems to be on a stabilising mode. It will consolidate slightly for some time and then we will see the growth kicking in. What is creating some confusion is these new set of numbers behind the CPI and GDP data. It is not clear what the actual status is. But the trend looks positive, which bodes well for the economy.
Is the credit health of companies any better now?
Let me quantify this: Rating agencies give out a ratio known as the modified credit ratio, which shows the number of upgrades relative to the number of downgrades in the company ratings. If the number of upgrades are more than the number of downgrades, it means the economy is doing well. That number was consistently coming down over the last few years indicating that downgrades were outnumbering the number of upgrades. Last quarter was the first time in many quarters that the ratio actually moved up, with the quantum of upgrades rising relative to the downgrades. These ratings are based on actual hard numbers. Theoretically, cash flows are improving. The liquidity situation is also much better in the banking system, which means companies have access to credit. Companies are also in a position to reduce leverage by raising equity. It has also become easy for companies to sell unproductive or stressed assets to raise cash and pare down debt. All this makes for a positive credit environment.
How big a concern are the rising NPAs in the banking system?
It is definitely an area of concern. The median credit rating for an Indian company by the rating agency Crisil is BB. So for the entire banking system, the average exposure is to BB rated paper—a low credit quality. So obviously there is bound to be a lot of stress when the economy slows down. Most mutual funds on the other hand will have median rating of AA. As such, the mutual fund industry is impacted much later than the banking system. Within the banks, private sector banks will have a better credit profile than the public sector banks. So one needs to segregate to see how the banks are actually placed.
How are your debt funds positioned at the moment?
The debt markets have seen some tough times over the past 3-4 years. This has been a good learning time for all mutual funds. We need to maintain our guard at all times. Even in a good environment, if you lower your lending standards you are inviting trouble. Just because the economy is doing well doesn’t mean all companies will do well. If you lend to a stressed company, you may end up with losses even in good times. Your lending standards have to be high at all times.
How should investors be playing debt funds now?
The long duration segment has rallied quite a bit. It doesn’t mean that it can’t rally more. From an investment perspective, with yields still remaining elevated at the shorter end and with the credit environment improving, we continue to remain positive on corporate bonds and accrual strategies. Duration strategies also continue to be favourably placed for 2015, with interest rates poised to come down further. You may want to look more at a corporate bond fund and less at a duration fund. We have a fund—Dynamic Accrual fund—which straddles both the strategies. So it will also take some long term duration bets apart from more stable corporate bonds. It will be less volatile as the exposure is predominantly to corporate bonds, yet it can also provide some duration benefit as rates are expected to come down over time.
Did the Budget do enough to remove concerns surrounding the economy?
The revised fiscal consolidation roadmap will help the government fund infrastructure investment, which has become a focus area, even though it may lead to slight upward pressure on bond yields in the near term. The government’s assertion that it will be able to meet the challenging estimate of a fiscal deficit of 4.1% in FY15 is a big positive. Meanwhile, a lower than expected government borrowing will help the private sector to participate more in raising credit. Overall, the budget was a balanced one for the debt markets.
Has the immediate rate cut by RBI come as a surprise? Do you expect further cuts in the coming months?
Yes, the rate cut was a surprise. While easing room still exists, we think the RBI will wait and watch for some time to see the lagged impact of the last two cuts, before taking further policy action.
Are you comfortable with how the broader economy is placed?
All macroeconomic indicators are looking much better now than they were a year back. Inflation has come down sharply over the past few months, so has the current account deficit. Forex reserves have shot up. Commodity prices have softened quite a bit. To that extent, the economy seems to be on a stabilising mode. It will consolidate slightly for some time and then we will see the growth kicking in. What is creating some confusion is these new set of numbers behind the CPI and GDP data. It is not clear what the actual status is. But the trend looks positive, which bodes well for the economy.
Is the credit health of companies any better now?
Let me quantify this: Rating agencies give out a ratio known as the modified credit ratio, which shows the number of upgrades relative to the number of downgrades in the company ratings. If the number of upgrades are more than the number of downgrades, it means the economy is doing well. That number was consistently coming down over the last few years indicating that downgrades were outnumbering the number of upgrades. Last quarter was the first time in many quarters that the ratio actually moved up, with the quantum of upgrades rising relative to the downgrades. These ratings are based on actual hard numbers. Theoretically, cash flows are improving. The liquidity situation is also much better in the banking system, which means companies have access to credit. Companies are also in a position to reduce leverage by raising equity. It has also become easy for companies to sell unproductive or stressed assets to raise cash and pare down debt. All this makes for a positive credit environment.
How big a concern are the rising NPAs in the banking system?
It is definitely an area of concern. The median credit rating for an Indian company by the rating agency Crisil is BB. So for the entire banking system, the average exposure is to BB rated paper—a low credit quality. So obviously there is bound to be a lot of stress when the economy slows down. Most mutual funds on the other hand will have median rating of AA. As such, the mutual fund industry is impacted much later than the banking system. Within the banks, private sector banks will have a better credit profile than the public sector banks. So one needs to segregate to see how the banks are actually placed.
How are your debt funds positioned at the moment?
The debt markets have seen some tough times over the past 3-4 years. This has been a good learning time for all mutual funds. We need to maintain our guard at all times. Even in a good environment, if you lower your lending standards you are inviting trouble. Just because the economy is doing well doesn’t mean all companies will do well. If you lend to a stressed company, you may end up with losses even in good times. Your lending standards have to be high at all times.
How should investors be playing debt funds now?
The long duration segment has rallied quite a bit. It doesn’t mean that it can’t rally more. From an investment perspective, with yields still remaining elevated at the shorter end and with the credit environment improving, we continue to remain positive on corporate bonds and accrual strategies. Duration strategies also continue to be favourably placed for 2015, with interest rates poised to come down further. You may want to look more at a corporate bond fund and less at a duration fund. We have a fund—Dynamic Accrual fund—which straddles both the strategies. So it will also take some long term duration bets apart from more stable corporate bonds. It will be less volatile as the exposure is predominantly to corporate bonds, yet it can also provide some duration benefit as rates are expected to come down over time.
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