His responses are usually rapid-fire, he is as hands-on as his portfolio managers are and he is equally comfortable fielding questions about bonds and stocks. Meet one of the few CEOs in the fund industry who is as passionate about stock selection as he is about expanding the assets managed.
You have recently launched a new banking fund. Do bank stocks make a good bet when interest rates are heading up?
Instead of looking at the rate cycle, you should look at the growth in GDP. Banking as a sector has a direct correlation with the growth in GDP. Economic growth, in my view, has more or less bottomed out and any improvement from hereon will reflect on the banking sector.
As far as non-performing assets are concerned, we feel that has also more or less peaked out for two reasons. One, there is substantial effort being put, by the banking sector as a whole, to maintain asset quality.
Two, promoters of companies are trying to raise money through sale of assets, to repay their debt. We have recently seen many cases where promoters are being forced to look at options, such as selling facilities or businesses to consolidate their balance sheet and reduce their debt.
Recent initiatives by government to revive the infrastructure space should see cash flows improve and hence NPAs in the system should ease.
The market has rallied in expectation of green shoots. Is the worst over for the economy?
We believe economic growth has more or less bottomed out. There could be improvement from here on three counts.
One, the government has been expediting clearances for many stalled projects in the last six months. This should reflect on growth over the next six months. Two, good monsoon is likely to boost rural consumer spending.
Three, with the rupee hovering in the range of 62-63 to a dollar, there has been good pick-up in exports which should boost the manufacturing sector. Reduction in gold imports and rising exports should help manage the balance of payments problem. This should abate concerns on the currency.
What is your take on inflation?
The wholesale price index (WPI) inflation is at 6 per cent, while the consumer price index (CPI) inflation is higher. However, the RBI is evaluating a common index so that it presents a balanced picture between the WPI and CPI. Hence, we believe that we can see a pick- up in economic growth and stability in the currency and inflation.
With the ten-year Government bond yielding 8.75- 9 per cent, have interest rates peaked out?
The RBI’s recent moves have brought more stability to the short-term interest rates. With an improvement in liquidity, the situation has improved and more funds are available for borrowers now.
The current yield on the 10-year G-Sec is substantially more than the long-term average of about 8 per cent.
This suggests that the rates have peaked. Even if the new combined inflation index settles close to the 8.5 per cent mark, the RBI may hike rates only marginally from here. On the contrary, if inflation dips, we may see flat to lower policy rates.
Liquidity should also improve in the second half of this fiscal. With interest rates ruling high, there may be substantial pick-up in the deposit growth too. This could drive up the demand for G-Secs owing to banks’ statutory liquidity requirement.
Are you increasing the duration of your bond funds?
We prefer to maintain a longer duration in our bond funds, given the possible capital gains, with any movement in interest rates.
Our duration is about two-three years in case of dynamic funds, and about six years in case of gilt funds. Given the volatility in interest rates over the last few months, it is better to maintain a static duration profile than trying to play the interest rate movement. Again, the short-term interest rates (for one to three years) are more or less largely stable and are also attractive at 9.5-10 per cent. We are also offering short-term funds which follow an accrual type of strategy.
This strategy basically implies buying securities and holding till maturity and not buying much on the longer end of the yield curve. So, if we can apply this accrual strategy in the one- and three-year segments, then we can bring in more stability, both from the portfolio managers’ and investors’ perspective.
Finally, we are also seeing opportunity in the lower credit segment, particularly in companies with a reasonably good business and management. We are taking calls on increasing exposure to select companies, which do not have a huge debt burden. This will help short-term funds to generate higher returns, by taking credit exposure instead of duration.
FIIs continued to pull out from the bond market in spite of attractive rates. Why?
That has also to do with the fluctuation in the currency rate. Hence, as and when we find some stability in the currency market, we should see larger flows from the FIIs.
The inflexion point for the Indian bond market will be the inclusion of Indian gilts in the emerging market bond index. Having said that, in the recent past, inflows into the bond markets have improved.
This is primarily on account of improvement in macro variables and reduced volatility in the currency market. Given the attractive yield, we may see the trend continuing.
About him
Oversees assets valued at ₹85,086 crore
Has managed debt and equity funds for 17 years
Has been with Birla Sunlife since inception
Previous stints at GIC Mutual Fund and Canbank Financial