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’m your host Anupam Gupta, B50 on twitter and in this episode, we are going to discover the recipe behind ‘The Importance of Geo Politics in Debt Funds’ from our guest chef Bhupesh Bameta, Economist - Fixed Income at Aditya Birla Sun Life Mutual Fund. Bhupesh, Welcome to the show! Let’s get into an introduction to yourself, background, how long have you been working at Aditya Birla Sun Life Mutual Fund.
BHUPESH: Hello Listeners, Welcome to the show! It’s a pleasure to be talking to you all. I have been working as an economist at the Aditya Birla Sun Life Mutual Fund for the last one year. Before this I have a total work experience of more than ten years I have been working as an economist tracking domestic and global markets in all the three mid asset classes. I have worked in equity, I have worked in fixed income and also worked in currency markets. Till now I have been working in the sales side this is the first time buy side role for me and I think I am just enjoying the role.
Anupam: Fantastic! So, Bhupesh for an economist as you said whether he is on the sell side or on the buy side tracking policy across the board you know whether it is monetary policy from the RBI, whether it is fiscal policy as announced by the government in the Budget is a very important thing right whether it’s for equity and whether it’s for fixed income. Can you tell us why it’s important?
BHUPESH: Yeah, I mean it’s a policy making is very crucial for I would say most asset classes, currencies equities fixed income just a big down into two major policies the monetary policy and the fiscal policy they together determine the level of economic output that economy is going to get they determine the interest rate, determine the inflation. More specifically monetary policy will determine it will anchor the short-term interest rate it will determine the quantum of money in the economy the amount of credit in the economy and it will also have an influence on the longer-term interest rate as well as overall economic growth and I would say inflation. Fiscal policy relates to the overall level of receipts and expenditures by the government of India. Now government is the biggest borrower in the market it has supplied the largest amount of debt papers and thus its very crucial for the debt markets. Besides that, government also determines the amount of actual economic output it has the influence on inflation it has also an influence in a big way on the overall taxation policy and which asset classes are more favorably taxed as compare to others
Anupam: So Bhupesh tell us about these three things two or three things that you track some metrics in monetary policy and two or three things that you track in fiscal policy.
BHUPESH: Yeah so in monetary policy the most crucial variable that you track is the repo rate that is the rate at which banks can go to RBI to get money. The second important variable you track will be the CRR the cash reserve ratio which is the amount of money which the banks have to park in RBI. The other important things which we note in the monetary policy is the RBI stand whether they are accommodative, neutral or restrictive in nature plus any hint which they might be giving in terms of the overall the stands in terms of liquidity whether they will be doing more or not? That’s a different equation for monetary policy but for fiscal policy the key variable which we will track will be the fiscal deficit, the overall level of government borrowing and the overall level of government spending and the sector that will be spending.
Anupam: Okay and just to put these numbers into perspective right now I believe that the repo rate as 6.25%
Anupam: And the RBI stance is
BHUPESH: They have changed their stand fromcalibrating tightening to neutral this time
Anupam: Great! So, if we have a small recap of these numbers right now, I believe that the repo rate is what 6.25% and the RBI is said that they are goanna be there they have changed their stands from
BHUPESH: From calibrated withdrawal of accommodation towards a neutral policy
Anupam: Fantastic! And the CRR would be?
Anupam: In this Budget was 3.4 %
BHUPESH: Yeah so there has been little bit of fiscal slippage this year but 3.4 is still a very good number. There has been years and years seeing fiscal deficit in excess of 5% and 3.4% deficit though minus slippage compared to 3.3% target and a little bit of slippage compared to the fiscalroadmap it’s still a very decent number especially considering that it’s an election year and sometime government have been seeing to be spending little bit more money before election. I think this has been a very credible fiscal stand by the government throughout and despite fiscal slippage I think it should be pretty okay
Anupam: Okay, the last two numbersare obviously, GDP growth and inflation. What’s where are we right now on that what is the GDP growth for the latest reported fiscal period?
BHUPESH: So, I mean there have beenteddydown take in terms of GDP forecast we have begun the year at 7.5% it came down to 7.4% and now we are at 7.2%
Anupam: Okay and CPI Inflation?
BHUPESH: Inflation numbers are also surprising very much on the down side. That’s quite good for the economy. I am not sure very good for the economy but definitely good for the bond markets. The latest print at around 2.1%. I mean RBI has this target zone between 2-6% and when we initially had this target of 2-6 %, most of us were amused on how can we have so low inflation I mean 4% was the median target which RBI had and at that time we used to think that 4% is a very difficult number to achieve but now for months after months we are getting low inflation and 2% was like I mean three years ago you would have laughed if somebody had said we can have such low inflation for such a long time.
Anupam:Okay Bhupesh so let’s get down to this major event of 2019 all of us know its happening in the next couple of months and its going to have an impact on market whether its debt whether its equity namely the general election right the upcoming general election expected in the next 2 or 3 months. What do you think will be the impact of this upcoming general election on domestic markets and on policy making?
BHUPESH: Yeah, I mean while there are no clear-cut relation between market performance and election. Generally, we have seen that in the general election we havemarket volatility we have done some analysis of the past three elections and they had no clear-cut trends in terms of where yieldswill be before and after election. I think it will all depend upon if we get a stable government or not that will be a crucial factor which market will be looking at. Typically for fixed income market in particular what do you need is a lot of macroeconomic stability and political stability is very crucial to that and so I believe that so long as you get the stable government markets should be okay with that but having said that *** market will be little nervous FIIs in particular will be little more nervous. But I think from there onwards once we have the government it will all start to depend on what kind of policies they pursue.
Anupam: And in general, I believe that when yields they go up unusually let’s say that they have gone up from whatever 7 or 7.6 maybe they go up 40-50 points in a very short period of time that is an indicator of volatility. Listeners to understand you know when what does it mean how do they gagewhen the bond market is volatile what does it mean?
BHUPESH: Right so I mean any sharp movement in deals both in short term and in the longer term that has an influence not only on fund performance, market performance but also on broader economy and I would say that in terms of actual policies I mean we have seen government both from the UPA government and the NDA government and in terms of longer term policy there seem to be a lot of I would say conversions I mean the policy they pursue and so I think the key determinant will remain whether they will get a stable government or not. I think the government is stable people should be okay with that
Anupam:Okay and the current bond yield is what?
BHUPESH: Depend on which paper you are looking at thepaper we track is closer to 7.6. Little lower than 7.6 but yeah.
Anupam: Okay, understood. Let’s take one step back and look at the budget which was announced on 1st Feb right. Can you tell us your view on that and especially about the major announcement regarding the direct transfer of around Rs. 6000 a year to farmers and whatever else was announced as a package towards that. Can we get onto that?
BHUPESH: I mean for the last budget of this current government. I mean the key target seems to give more money in the hand of the farmer lower middle classes in terms of fiscal deficit the number we track very closely but as I said its pretty okay the key scheme with the government announced was that in which they gave Rs 6000 per year to farmers owning less than two hectares of land the total cost of the scheme is supposed to be around Rs75000crore as of now. That’s pretty okay I mean there has been some sort of disputes for farmers in the last few years. We have had a problem in abundance there very strong output which resulted in crash of farm prices despite having very strong output very strong production of most crops farmers weren’t getting enough money so this is one way which has been tried across the world farmers have been getting support in many other countries also and this is our way and I think so long as the level of fiscal deficit remains in control I think this is a welcome step. Second, I think what was announced was the tax SOP for middle income classes I thinks that’s also pretty decent thing they you can say given the fact that seen some slowdown in consumption more money for farmers more money for middle income class that should be pretty okay yeah. Overall, I think it’s a decent budget especially considering that its happen just before the election, pretty credible should give up a boost for growth
Anupam: What are yields post budget? the yields have been more or less stable right they have not really reacted in a very sharply negative or a positive way so even when the bond market the verdict seems to have that this budget is fine with them.
BHUPESH: So, there was some uptake in deal, but not that much sectional market was fearing the bigger worry negative surprise for the market were not the level of fiscal deficit but the level of gross borrowing so there were some negative surprise in the level of gross borrowing. I think the overall scheme of things and the way we have been seeing fiscal consolidation it’s a pretty decent number and I think the market should take in that into strike.
Anupam: Okay now lets just zoom out a bit and look at the world okay especially Geopolitics which have really taken center stage because global fixed income markets are also watching this nice dynamic between the two biggest countries in the world that is US and China right both countries. So, China is seeing a slowdown in economic growth, US also there are some concerns or some people talking about a possibility of Recession.
BHUPESH: So, I mean US has seen a pretty strong growth it’s a very super-hot growth in the last one year. Partially because of fiscal instrumentand partially because of national momentum higher growth. So, what we are seeing in US is the slight slowdown from a very high level of growth. I mean economists’ estimates that the US potential output should be a bit lower than 2% there were quarters in 2018 when we had seen growth closer to 4% now that’s a very high number and we are seeing some moderation there but definitely I mean given the fact that last year also we had stimulus and this year the fiscal stimulus will come down somewhat called some sort of fiscal drag that will have some negative impact. So, in US growth we are pretty okay though slow down from last year, I think it’s pretty okay but little bit more worrying is the slowdown which we are having in China and especially given the fact that China also has structural issues in terms of very high level of debt. Both these economies US China are very crucial for the world markets world economy biggest largest two economies deep connections both were the global markets and global economy. A very strong trade relation with rest of the world so this outcome of this trade relation is very crucial not only for these economy in general, but I would say for the overall level of globalization we are seeing some pausing in globalization and the outcome of these stocks will have a crucial bearing on what happens in future. Besides that if we have a if we do manage to get some positive output I think that should be risk gone for global asset classes yield in particular and Asia more in particular because India is a part of EM basket so even if we are not a part of that value seen in which these US China trade relations are being discussed right now it will have an impact on Indian markets as well. I would believe that positive outcome should result in more flows for overall EM basket and also therefore a lot more flow for Indian markets that should be positive for both Indian debt markets Indian currency and also in equity as well.
Anupam: Fantastic! 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 had 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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