Quantum MF's Pathak sees liquidity improving on bond index inclusion

Quantum MF's Pathak sees liquidity improving on bond index inclusion

Informist, Tuesday, Feb 20, 2024


By Kshipra Petkar


MUMBAI – Liquidity in the banking system is likely to ease only after June when foreign funds start coming in following the inclusion of Indian government bonds in global bond indices, according to Pankaj Pathak, senior fund manager-fixed income, Quantum Mutual Fund.


"My sense is that it (foreign inflows) should be (starting) somewhere around the Jun-Aug period where we will see substantial flows coming in and the RBI (Reserve Bank of India) intervention in the FX (foreign exchange) market increasing and that would add additional liquidity in the banking system," Pathak told Informist.


Indian government bonds will be included in the JP Morgan Global Bond Index–Emerging Markets suite over a 10-month period starting Jun 28. Market participants expect foreign fund flows of $25 bln-$30 bln to follow. Pathak said the inclusion of Indian bonds in the global index will provide a consistent source of demand for Indian bonds.


In the near term, Pathak expects short-term rates to tighten in the next few months owing to the liquidity deficit in the banking system. The deficit was at 1.94 trln rupees on Monday, data from the Reserve Bank of India showed.


Pathak said he sees short-term rates going down in the second half of 2024 due to easing of liquidity conditions and likely cuts in the repo rate by the RBI. "We are somewhere near the inflection point, where the rate cycle can turn and central banks can start cutting rates," he said. "Maybe it will start in the Western world and then come to India."


On the longer end of the curve, Pathak sees demand remaining favourable on the back of huge inflows from insurance companies and pension funds. The government's accelerated fiscal consolidation is also likely to aid long-term bonds.


The government's Interim Budget projected a lower-than-expected fiscal deficit of 5.8% of GDP and 5.1% for the current financial year and next year, respectively. It projected the government's gross market borrowing in 2024-25 (Apr-Mar) at 14.13 trln rupees, 1.3 trln rupees lower than the borrowing of 15.43 trln rupees in the current financial year.


Pathak expects the central government to reduce market borrowing by another 1.5 trln rupees over the next two years. The government aims to reduce its fiscal deficit to below 4.5% of GDP by 2025-26. The senior fund manager expects the government to set a new target for fiscal deficit and continue consolidation beyond 2025-26.


“We will see further reduction in the government’s borrowing," he said. "So, on the one hand, demand for bonds has increased and, on the other hand, supply is falling. So, the overall demand-supply mix is very favourable for longer duration bonds." Overall, things look positive for the bond market and yields are likely to fall in the next year or two, he said.


Pathak said he is not too concerned about the compression in spreads between corporate bonds and gilts, and he still believes there is opportunity at the longer end of the curve. There is a lot of traction in the three- to five-year corporate bonds segment as they are in a "sweet spot", he said. "Since liquidity is another concern, what we have found is that the three- to five-year segment is the most active, especially in the AAA and AA papers."


The senior fund manager said the government removing the benefits of long-term capital gains on debt mutual funds has not had any material impact, and flows into these funds have been rising gradually. Pathak expects the government to continue to keep its focus on fiscal consolidation in the regular Budget after the General Election.


In a General Election year, the incumbent government presents an Interim Budget to Parliament. Once the new government assumes office, it presents a regular Budget. In an Interim Budget, a vote-on-account is passed for a part of the fiscal year, pending passage of the regular Budget.  End


Edited by Rajeev Pai


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