Informist, Monday, Apr 22, 2024

--Nuvama Marwaha: Don't see "crying need" for rate cut in India now

--CONTEXT: Comments by Nuvama Group's debt head Marwaha in interview

--Nuvama Marwaha: Don't think MPC needs to track FOMC's rate path

--Nuvama Marwaha: Inflation biggest concern for India right now

--Nuvama Marwaha: Debt investors' current mood difficult to gauge

--Nuvama Marwaha: Bond index inclusion to impact RBI monetary policy

--Nuvama Marwaha: Debt mkt infra crucial to lure active foreign funds

--Nuvama Marwaha: Expect fintech cos to borrow funds via FX loans

--Nuvama Marwaha: See strong appetite for Indian lower-rated credit

--Nuvama Marwaha: GIFT City future for Indian cos to borrow overseas

--Nuvama Marwaha: May not seek online bond platform licence instantly

--Nuvama Marwaha: FPI flows into corporate bonds may take some time

By Aaryan Khanna and Subhana Shaikh

MUMBAI – With India in a sweet spot and growth in the right direction, there is no "crying need" for the Reserve Bank of India to cut interest rates at the moment, said Ajay Marwaha, senior executive vice president and fixed income head at Nuvama Group. The RBI's Monetary Policy Committee does not necessarily need to track and follow the footsteps of the US Federal Open Market Committee, he said.

"I think India does not necessarily need to track and tag along with what is happening to the Fed. I think the rate cut sort of noise in India is pre-emptive. I am not sure if it needs to exist," Marwaha told Informist in an interview last week.

Marwaha cited inflation as the biggest cause of concern for the Indian economy, and said that the RBI needs to calibrate inflation data better. Regardless, Marwaha praised the central bank's guidance of the economy through and beyond the COVID-19 pandemic.

"I like the fact that although their actions have been very benign, the rhetoric has been reasonably hawkish, and they really need to calibrate inflation better," Marwaha said. "They need to keep inflation in check. For a growing economy like India, particularly the kind of demographic we have, inflation is a far, far bigger concern than anything else."

Earlier this month, the MPC kept the policy repo rate unchanged at 6.50% and decided to maintain its stance of 'withdrawal of accommodation' for the seventh straight meeting. The central bank has kept its projection for CPI inflation in the current financial year unchanged at 4.5%, though it lowered the forecast for three of the four quarters by 10-20 basis points.

It is difficult to gauge the mood among fixed income investors at the moment, Marwaha said. However, he believes that rates in the short-term remain a concern and, in the medium-term, investors have a reasonable handle of what the monetary policy situation is between central banks and where inflation is headed.

Marwaha, who is based in London, declined to give a timeline for rate cuts in India and the US, but said the direction of travel is clear in investors' minds: a secular downward fall in yields. But the pace of travel has been a growing concern in the market, which is becoming more of a worry now after the recent data in the US pointed to continued strength in consumer demand, the labour market and inflation.

According to the CME FedWatch tool, the US policy outcome next week is almost unanimously expected to be a pause. While there was earlier a consensus that the US Federal Open Market Committee would cut rates by June, the timing of the rate cut has consistently been pushed back, so much so that even by September, only 65% expect a rate cut. Around 15% of the Fed funds rate traders expect that the US may skip cutting interest rates in 2024 altogether.

On external commercial borrowings and dollar bond issuances, Marwaha said Indian issuers, especially non-banking financial companies, need to get into a state of preparedness amid a changing geopolitical environment. While there is an availability of liquidity and credit for domestic borrowers overseas, markets will dictate the timing, said Marwaha, who is responsible for Nuvama's onshore and offshore fixed income business.

Nuvama, which has offices in Mumbai, New York, London, Singapore and Hong Kong, has over 100 foreign portfolio investors as clients for its debt offerings.

Asked if he expects financial technology companies to tap the offshore market route for their fundraising needs, he said that the external commercial borrowing route is open for such companies. "There are pockets of liquidity, private investors, who are happy to look at debt structures, who are happy to look at hybrid structures coming to this space. We've seen a plethora of such transactions...I see those continuing. There's no reason they should stop."

Marwaha is of the view that masala bonds, which offer the best of both worlds, will be a powerful market for Indian borrowers only if the government provides a tax exemption. Masala bonds are rupee-denominated bonds that Indian entities issue outside of India.

Currently, the dividend income of foreign portfolio investors is taxed at the treaty rate with the country where the investor is based, or 20% that is India's withholding tax rate, whichever is lower. When borrowers raise funds through the International Financial Services Centre, the government charges capital gains tax at the rate of 9% in GIFT City.

In the long run, he believes GIFT City is the future for Indian borrowers who want to raise funds overseas. However, he feels the approach should be a permanent one to deepen the market, rather than a stopgap solution such as lower taxes, which may not be extended in the future.

"We should look for permanent solutions and not shortcuts such as tax arbitrage, which may or may not work in the long-term... Indian companies borrowing through the offshore market in the long-term would complement their domestic borrowing as it reduces the pressure on domestic lenders. It also reduces systemic credit risk," Marwaha said.

Asked if Nuvama Group would look at the lower rated credit space given the recent boom in the Indian private credit market, Marwaha said that the group has been doing a lot of work with 'A' and 'AA-' rated categories of issuances and sees strong appetite for this kind of risk. But the lack of liquidity and assured exits for investors are tempering the amount of business that Nuvama explored there.

"We see a lot of appetite for this kind of risk, but we are much more calibrated when we approach this kind of risk because what we want to do is make sure that we are comfortable with the risk that we are selling...Yes, we are getting into high-yield space, but we will be very measured when we approach it."

Marwaha also said that Nuvama group would not be looking to foray into the online bond platform space immediately. "...at some point in time, it is definitely a possibility. I would like to see the investor community mature a little bit before we do that."

Marwaha said the inclusion of India's gilts in global bond indices may be a double-edged sword and will have an impact on India's monetary policy in the future. While the bullish aspect is playing out right now, at some point in time, massive outflows may also take place amid a global crisis and India needs to ensure that regulation remains consistent in good times and bad, he said.

"(What) we really need to recognise is that whenever international money comes into our country... you need to keep that money portable, which means we have to be very conscious that we don't put any restrictions on the money going back out," Marwaha said. "When they act as a herd and money moves out of the country, it will have an impact on our monetary policy and the central bank needs to calibrate that, needs to be very conscious that that can happen."

JP Morgan and Bloomberg have announced including Indian government bonds to their emerging markets bond indices in the current financial year. Analysts expect foreign portfolio investment inflows of $25 bln-$30 bln on this account. FTSE Russell also has India's bonds on its watchlist for inclusion.

While passive investors who track the index will buy bonds anyway, India should use the opportunity to integrate its market infrastructure with services such as MarketAxess and Tradeweb to attract active fund managers, Marwaha said. The opportunity for Indian bond markets is that these funds will start looking at India more aggressively as an investment destination, even if their purchases may not be immediate. Clearing Corp of India Ltd is in the process of developing an interface between its gilt trading platform and international trading platforms to give foreign investors easier access to the domestic debt market, Informist had reported in February, quoting people familiar with the development.

"I think the infrastructure that needs to be built to enable those active funds to come in is super critical at this point in time," he said. "So, all kudos to everybody who is working on TradeWeb coming in. I am all for those dialogues that are happening, CCIL with EuroClear and ClearStream and trying to get clearing systems aligned, making it easier for these active funds to come in and trade India."

With a new class of bond investors coming in, there may be a direct kickstart for domestic growth as India's financial institutions channel savings to the real economy. "When you leave more pools of capital to kind of go and chase growth, that's what will drive growth and selective growth, which is what we need," the Nuvama fixed income head said.

Marwaha believes it would take some time for foreign inflows to move to corporate bonds as the domestic credit market is yet to develop in terms of liquidity and infrastructure. The bunching up of international securities' identification numbers, or ISINs, by issuers could help consolidate the market and attract foreign flows into India's corporate bond market, he said.

In 2022, the Securities and Exchange Board of India had capped the number of international securities' identification numbers per borrower to a maximum of 14 for debt securities maturing in a financial year. Earlier, the cap was 17. The 12-character ISIN code is a unique identifier tagged to each security, including stocks, bonds, warrants and commercial papers.

"Now, if you can encourage them to actually do that under a maximum of 2 ISINs, you'll suddenly have a lot of FPIs wanting to come and trade in an ISIN which has $300-mln outstanding," Marwaha said. End

US$1 = 83.36 rupees

Edited by Akul Nishant Akhoury

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