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00:00 Ajay Mangalunia, who is Managing Director, Head of Investment Grade Group at JM Financial
00:04 joins us right now with his perspective on how should one read into this reiteration
00:10 about the JP Morgan bond index inclusion being on track and what it could mean for debt flows
00:15 amongst other things.
00:16 Ajay, great having you.
00:17 Good morning.
00:18 Thanks so much for joining.
00:19 I hope I got your second name pronunciation correctly, Ajay.
00:23 But I did.
00:24 Okay, thank you.
00:25 So, Ajay, how do you read into what's happening in the debt markets currently on the flow
00:29 side and the fact that there's just so much of to and fro when it comes to this JP Morgan
00:35 bond index inclusion as well, the timing that is.
00:37 Yeah, I mean, the fact is that the market was awaiting since a very long time for such
00:41 inclusions and you might have seen that since last four, five years, the India debt market
00:47 was pretty ignored by foreign investors, maybe for a couple of reasons.
00:52 They might be looking at some control on the fiscal and some bit of stability on the government
00:58 side.
00:59 And when all of those things are in place, JP Morgan was quick to kind of get this opportunity
01:05 and kind of included.
01:06 And yet they were struggling about getting some tax concessions and all of those things,
01:11 which government was very reluctant and they made it very clear that we are not here to
01:17 invite foreign capital in the debt on tax incentives.
01:21 And without tax incentives, I think foreign investors are looking at that this is a wonderful
01:25 opportunity, though they may not be too much of a straight edge of now, but in the near
01:30 term with a 4% kind of inflation anchoring aspiration and which is coming true, 7, 7.5%
01:38 kind of fields are definitely for the macros like India and all of the other active.
01:45 So I think JP Morgan, who had about 200 plus billion dollar worth of investments in this
01:52 particular indices was rather investors taking this and I see the basis is about 10%.
02:00 So we can estimate about say 20 to 25 billion dollars of inflows likely to be there in India.
02:06 And this is not only help kind of anchoring the yields and getting them, pushing them
02:10 down in that sale, making making a lot of India to borrow cheaper in the coming time.
02:18 This is just an initiation for one indices taking NTV to include.
02:23 I think there are others, including Bloomberg and that's the way it is.
02:29 If all of those happens, definitely that is in the coming years, we can see a lot improvement.
02:36 Ajay, good point.
02:39 Over the medium to long term, this is definitely India positive, even for the private credit
02:45 market, which has seen a pretty sharp uptick.
02:47 So good for India Inc. as well.
02:49 But let's talk the next couple of months.
02:52 I know that a lot of people were sitting on duration funds, hoping that a rate cut would
02:57 come away.
02:58 Now with the delay rate cut in the US, there is no way India can go out and cut rates before
03:03 the US does.
03:04 So while these flows are significant and they've moved the yield curve to some extent, do you
03:11 think that over the next couple of months, do you think post June 28th or to the run
03:15 up to June 28th, flows will increase and that will impact yields in the near term?
03:21 I ask you this because the last one month has actually seen outflows out of the Indian
03:26 bond markets.
03:27 So Samina, if you see carefully, after the news of global bond indices inclusion, in
03:33 the far bonds where foreign investors can assess and freely buy these papers, we have
03:39 seen an inflow of $8 billion.
03:40 There's been a little bit of outflow with kind of yields moving up in the US market.
03:46 But if you look at Indian market, the yields have not moved, rather they've been kind of
03:50 after moving in directionally with the US market have tapered down back.
03:56 So I would say 7.10, 7.20 is kind of a range since a long time.
04:01 And I don't see yields moving drastically beyond 7.20, 7.25 levels.
04:07 So they are more or less likely to get anchored here.
04:10 Apart from the rate cut, the largest story is basically in the coming times, if the inflows
04:15 and the demand for Indian papers are likely to be significant.
04:19 We have anyway decoupled in terms of new trajectory from US or the western part of the world.
04:25 And you might have seen with even 70, 80 basis points in moments in western part of the world,
04:31 Indian market has not been moving in the same proportionate, but directionally, yes, it's
04:38 one to basis points or maximum a couple of fall, then that's it.
04:42 The main point we need to see that private credit will also get influenced because the
04:47 thing is that even the global investors are taking the yields in the sovereign down.
04:53 The spreads on the private credit and corporate bond will become attractive.
04:58 And the next attention, once the global investors looking at G-Safe, the next attention they
05:03 can probably put it on the credit worthy, a couple of intras and sovereign and AAA and
05:11 quasi sovereign papers.
05:13 So we see this flow not getting restricted only for the sovereign, for the government,
05:19 but this will trickle down to as low as AA rated credits.
05:23 And we have seen that for 2017, 18.
05:26 Right. So just in terms of advice, if you had invested in debt mutual funds, you know,
05:33 maybe mid last year, early last year, end of last year as well, I wouldn't rule that
05:37 out.
05:38 You will be expecting that you'd make an M2M gain.
05:40 Of course, one way is to hold it for three years for tax purposes, which is to maturity.
05:46 Alternatively, a lot of traders and investors got in hoping that the M2M would yield enough
05:51 for them to justify solid returns.
05:53 I mean, there was also talk about double digit returns on those debt funds.
05:56 I understand you.
05:57 I understand you.
05:58 I understand you.
05:59 But at this stage, what should those investors do?
06:04 Should they exit these positions?
06:05 Because this is not going to happen in the next one year from the look of it.
06:09 And second, for a fresh investor looking to enter the debt mutual fund space in order
06:13 to create and gain that alpha from the debt funds, is that recommended?
06:18 Are you telling your clients to go out and, you know, invest into debt funds at this stage,
06:23 keeping everything else in mind?
06:25 So debt funds obviously can't give the equity like returns for sure, but they give a lot
06:29 of stability.
06:30 Equity markets may be a little more volatile.
06:31 On the debt side, the markets are a little less volatile, so we can't couple it all.
06:37 But my sense is that if somebody invests today and he takes that duration, and that depends
06:42 on the respective fund manager.
06:44 So investors would kind of have some patience and put money in the funds which have a larger
06:49 duration.
06:50 So a rate cut might not be a only requirement for markets to move in that sort of way down
06:57 and have a double digit returns.
06:59 What I see is that if somebody is getting a 7, 7.5% kind of a gain on his investment
07:05 and that is moved down over the next two years, I'm not talking about a year, but if it's
07:10 moved down by, say, a couple of basis points, maybe even 50 basis points from here, in the
07:15 duration fund, you can easily make 3, 4% extra capital gain.
07:19 And that will translate to double digit kind of a return.
07:21 So expectations of having a double digit kind of return over a slightly medium to longer
07:26 period is absolutely possible and that's reasonable.
07:31 Okay, so that's great to hear that that view still remains.
07:35 A 50 basis rate cut or movement on the yield curve could generate 3 to 4% alpha on your
07:41 paper.
07:42 So if you're at 7.5%, you add another 4% to that, you're almost close to 11%, which justifies
07:47 investing in the debt markets.
07:49 But remember, debt usually is an instrument which is a safe instrument and that's the
07:53 stability part of the portfolio.
07:54 It's equity that's supposed to do the sprinting for you in that sense.
07:58 But thank you Ajay, it's always good to get perspective on how the dynamics between equity
08:02 and debt work out and impact an investor's portfolio.
08:06 Worth noting is that our inclusion will also lower the private credit costs.
08:11 So you've also seen a big jump over 50% in FI23 itself, where private credit was being
08:17 raised by Indian corporate.
08:18 So if cost of funding does come down, it is going to have a positive impact on the earnings
08:23 of India Inc, which would then of course also impact the stock market performance.
08:27 Thank you.
08:28 Thank you.
08:29 Thank you.
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