Anupam: Hi Listeners, we at Aditya Birla Sun life Mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realize your investment goals.
HI, I am Anupam Gupta @b50 on twitter and in this episode, we are going to discover the recipe behind ‘Why Inflation is important in Debt Fund’ from our guest Chef ‘Mr. Pranay Sinha, Fund Manager at Aditya Birla Sun Life Mutual Fund.
Pranay, Welcome to the show! Tell us something about yourself, your introduction, how long you are working at the mutual fund.
PRANAY: Sure, thanks for welcoming me on this episode. So, I’ve been in this market for around more than ten years. I joined in 2006 in ICICI mutual fund. I was an analyst there and a trader there. From there on I moved on to Morgan Stanley investment management as a fund manager. Then I went to BNP Paribas as an interest rate and forex currency trader. I stayed there from 2010 to 2014 and in 2014 I joined Birla.
Anupam: Fantastic! So, you know that long stint on the debt fund side would have given you a lot of perspective. One thing that we hear a lot is that inflation makes a lot of difference to a debt fund manager. Can we just start with that because we’re goanna be talking a lot about inflation today? Why is inflation so important?
PRANAY: So, interest rate as it is broadly defined by the interplay of growth and inflation and other things which arise from it, right. Now on that basis itself inflation would be very important because it’s one of the two factors. Whatever has happened in last 5 years is that RBI has given the mandate of inflation targeting. So that has meant that beyond growth inflation has become the paramount driver for interest rates and as a debt fund manager our intention is to track how the interest rates are going to behave and for that to happen we have to track how inflation is going to be and I’m giving you an increasing order of importance what has happened in last policy that RBI has now come and said that it’s tracking headline inflation only. So that means that whatever importance given into inflation earlier has only multiplied in whatever RBI has said in last policy. So that’s the simple basic reason why we track inflation obsessively so much.
Anupam: Let’s just explain the few basic terms for our listeners right. Headline inflation, CPI inflation, WPI inflation, probably food inflation and core inflation. Maybe you can just walk us through that.
PRANAY: So, most of these things are self-explanatory. CPI Inflation would be the inflation which median person in the country would be experiencing. So there’s a basket prepared in which the weightage given to each item is what a median person is the country is experiencing. It’s not a GDP weighted it’s a median person weighted. So a median person won’t be you and me. It would be some down the slide on the food chain. He would have a fifty percent expense on food and say ten percent on rent and so forth. So that’s what CPI Inflation is tracking how the prices affect the median person in the country. WPI Inflation is Wholesale Price Inflation. It’s the factory gate inflation. Earlier when the data was not so robust WPI Inflation was taken as a proxy for whatever the consumer is experiencing but that’s not the case as we have realised. And Hence, it’s a parameter still now but it’s not a paramount parameter right now.
Anupam: Okay! Let’s get into two specifics, we know we’ll structure this discussion in two parts. One is that the current set of inflation data is seriously low. Okay so first I want to get into what are the key drivers behind this low inflation print and second, I want to get into this stickiness of core inflation. Okay so let’s start with why inflation the current set of data is so low.
PRANAY: So, last print was 2.05%. just to give a perspective the lower print than this was 1.5%. which we saw around 18 months back. So, from that perspective the current print is very low given that the target is from 2 to 6 and the print is just coming near the lower end of the basket. However, the thing is that even when we were tracking 1.5% inflation in June 2016 then also the food inflation part was around -2%. Right now, we are tracking 2.1, 2.2 and our food inflation part is around 2.5 to 2.4%. So last to last print food inflation was negative, -2.6%. last one was -2.2%. So as compared to the previous episode food inflation is playing a much bigger part right now and broadly, I can say that that is almost 90-95%, explanation can be provided why inflation is due to food inflation.
Anupam: Okay! Let’s get into this Core Inflation thing. What exactly is core inflation you know and what explains the stickiness of this core inflation.
PRANAY: So, core inflation is the part of the inflation which is non-volatile. So you take out the food. And then you take out the fuel. Fuel is governed by the global crude oil prices. So that as we have seen is prone to volatility. Again food we have seen has attacks bouts of extreme volatility. You see potato selling at Rs. 5 and you can see it selling at Rs. 30 and it can happen in a matter of 15 days. So that tends to have an amount of volatility which is not very desirable but that’s still part of a consumer basket and still part of headline inflation. So, Core Inflation is a part which is more sticky part right. So you don’t the rate of change say just to give you a thing which will be more familiar to you around 20-25% of the Core inflation is housing inflation. So, your housing prices right now say is increasing by 5%. It use to increase by 10%, 3-4 years back. However you won’t see that there would be much change. Most of the contacts would have say that we have a 4-year contract with your landlord, and they would increase by 5% every year. So that explains the stickiness of the part. It goes down slowly, it goes up slowly.
Anupam: Okay. So Pranay there are two clear trends happening out here. Food inflation seems to be going a little bit volatile like you had just said. Core inflation on the other hand you know whether it’s because of housing prices or whatever the non-food, non-fuel part seems to be a little bit stickier. So it looks like these two trends are going in different directions. How do you see this divergence playing out probably in the shorter and the long term?
PRANAY: So, one important part is that core inflation has really been sticky so just to give you a context, food inflation say 2 years back use to be 4-5%. Now its -2%. So there is a lot of volatility there. Core inflation use to be 4-4.5% one, one and half years back. Right now, it’s around 5 quarter 5.5%. Actually, it has gone up. So that’s what you mean I guess by saying that it’s divergent. Now what has happened is that people have tried to explain why Core Inflation has remained sticky and most importantly why it has gone up. Now there are two main reason forwarded for it. One is that there has been some issue with data. So for rural area what has happened is that the data collection methodology has changed since September 2018. So that would mean that there would be some issues with the data right now and so there might be there is a chance that core inflation at 5.5% which was the last print might be overstated. So, I would assume that around 40-50 basis point was stickiness of the core inflation might be there and that would only be cleared in six months or so right. So that’s one part of it. And the second part is bit philosophical in terms of the stickiness of core inflation is that in a country our food production is doing very well our manufacturing production is doing very well but there is a supply side issue in terms of core inflation. So just to give you an example our per capita GDP is rising the highest in the world most probably in the big economies. Now what happens is that the services supply side issue cannot keep track with it right. Just to give you an example what is in the real world education, health these are the things the supply side takes time to catch up and that is causing the core inflation to remain sticky. Now that is phenomenon which has been observed in other emerging market countries also. The core inflation has remained sticky particularly the health and education sector while other part of the inflation has come down. So that’s a much more structural view on core inflation.
Anupam: Okay. Let’s wrap this up with the final question and actually the most important question which is what is your, what’s the structural view on inflation in India right now? Where we are going, where we are right now? I believe that the RBI has a stated target of 4%, plus minus 2 %. CPI right now is at 2%. So, where do you see this going? What’s your view on that?
PRANAY: So, I will structure this thing in two parts. First I will just tackle why food inflation is so low in India. That’s very important. What has happened is that globally last two decades 1-2 decades food inflation has been very low. Now India has been an exception from 2009 to 2014 and that has happened most probably due to some mismanagement of government policies. Now so that means that the episode of 2009 to 2014 was most probably an aberration and our food inflation will continue to remain low in line with what is happening globally. The second part is that what has happened is that in last decade or so per capita availability of food grains and other horticulture product has increased. Now from compared to 2-3 decades previous when it was mostly static it has increased in last decade or so. That has happened due to two reasons: one that food production has gone up and the second is that population growth hasn’t been happening at the rate as it used to happen earlier. So that means that per capita availability is better and that has kept food inflation low. Now even then a negative food inflation is not something.
Anupam: How does that work right because it’s a little bit hard to understand that food inflation is negative 2%? Does that mean that something that cost me Rs100 last year is now Rs98?
PRANAY: Yeah but just totally you would also observe right, you are getting potato at Rs15 - Rs. 20 that what you would have been getting. So totally it’s happening. Now the thing is that negative food inflation is not sustainable. Just as 11% 12% 14% of food inflation was sustainable,-2 is not sustainable so my view would be that both the core and food inflation will merge towards each other. Now the major part of this merger would be played by food inflation which has to go up so my view is that core inflation which is right now trending between five or five and a half would trend somewhere between four and four & a half most probably and food inflation will also trend towards it because now in food inflation there is one philosophical point which is going to happen in next year or so. What has happened is that due to government policies and due to as I said production reason the food production has gone up the food prices have gone down. Now that has hurt the interest of the farmers and what has happened is that when such things happen the government takes courses to correct these because you cannot let one part of the economy suffer so much and they have started to do things for it. Last year they did MSP thing and this year around 75000 crores for the farmer in terms of. So, what these changes in terms of trade would mean that the inflation thing which was working in the favor of the buyer will now turn to working in favor of the seller and that would mean that food inflation will mean revert to somewhere where core inflation would be. So, my essence is that next year or so both of them should converge around for quarter four and a half kind of thing.
Anupam: Folks that is a wrap on our show. For more such interesting know how’s continue listening to our Podcast MF 101 or simply follow the blog page of Aditya Birla Sun Life Mutual Funds, Bloomberg quint, IVM podcast or wherever you get your podcasts from. If you have any queries or some specific subjects you want us to talk about, with regards to mutual fund investments, reach out to us on our Twitter handle @abcabslmf. Thank you for listening to this podcast!
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