FY22 a big challenge for banking, financial industry

RBI's move to keep the policy rates unchanged has raised more questions than one. Two strong elements are quite likely to keep the average fixed-income investor engaged in the coming days. One, the subtle but unmistakable changes being witnessed on the interest rates front, and two, the central banker's indomitable stance as expressed in its latest credit policy. For the record, RBI has advised the market to seek positive signals emanating from the economic front. The trend may be seen against a backdrop marked by a definite recovery in business and industry but one that may well be sullied by a fresh bout of Covid in the coming months. Speaking to Bizz Buzz in an exclusive interview Nilanjan Dey, Director, Wishlist Capital Advisors, discusses these and other relevant issues

An investor should identity a decent range of debt securities, and preferably approach the market through debt funds. Just leave it to a group of professionals to allocate on your behalf. Keep a diversified portfolio by all means, but essentially adhere to shorter term options

The lenders in the financial ecosystem have already taken note of the recent growth indicators, including tax collections, commodity consumption, commercial vehicle sales and so on. All these have a collective impact on the economy, which is critically dependent on service and manufacturing segments, the two main contributors to its development

The RBI has kept policy rates unchanged. How does that impact the fixed-income market?

Yes, the Monetary Policy Committee has not altered the repo and the reverse repo rates, which remain at four per cent and 3.35 per cent respectively. This, as they say, is drawn from the accommodative stance that the banking regulator has now professed to adopt. I expect this to manifest in a number of ways eventually, especially so in view of the need to sustain the current growth trajectory.

Whether that can be actually achieved or not is not for me to predict, but one can say with sufficient confidence that the market will take a serious note of the RBI stance. Remember, some of the immediate impact of pandemic has been somewhat diluted. It still remains to be seen what the resurgence that everyone is afraid of will do to the market. As far as the investors are concerned, they will need to gauge whether inflation stays within the target range set by the authorities.

Speaking of inflation, this could be the real spoiler?

Yes, I agree. The idea is to keep it under manageable limits, which is the biggest challenge for the central banker at the moment. The country will do well if the RBI mission secures what the market expects it to achieve. I am glad to note that certain significant measures have already been taken ever since the latest credit policy was announced. The secondary market G-sec acquisition operations, for instance, have been quite authoritative.

I expect some serious moves to uncoil on this front by the end of the current quarter. The market expects a lot in terms of steady liquidity management strategies. I am sure mere tightening measures will not be enough to deliver what the investor community is seeking right now. Consumer confidence will be the key in the days to come.

What has been the reaction of the banking sector so far?

Banks are quite aware of the fact that the liquidity availed by them under the relevant plan will be purposefully deployed. The need to ensure adequate liquidity in the system is supreme right at this juncture. The purpose of banks is to lend to quality borrowers, and this is what the lending sector is expected to do in the future. Nevertheless, the extent to which loans and advances are actually extended to select sectors will be monitored closely by all quarters.

The lenders in the financial ecosystem have already taken note of the recent growth indicators, including tax collections, commodity consumption, commercial vehicle sales and so on. All these have a collective impact on the economy, which is critically dependent on service and manufacturing segments, the two main contributors to its development. Some healthy trends have been seen in these already, but again, banking initiatives will be blunted if Covid takes a turn for the worse. Mind you, however, the vaccine has arrived already and there is a country-wide vaccination drive even as we speak. This should certainly contain the disease.

Speaking of interest rates, changes seem to be around the corner?

Yes, so it appears. I am alluding to a few core indicators, one of these being the higher fuel prices in the country. Prices of essential as well as manufactured items are generally rising, which means the consumer price index will have to be tracked very closely from its current level onward. I am not sure how our manufacturers will not react to escalation of basic input costs.

Look, the government bond scenario is right now among the most vital factors in this context. We are discussing the market at a time when there has been significant volatility on that front already. There have been some adverse movements, you know. I am referring to recent changes in yields, which did keep the market agog for several weeks.

On the subject of yields, how do you think the situation will now pan out?

There could just be a modest upward bias of sorts. But the market does not really expect any significant upward movement at this point. In other words, the upward trend that investors are discussing now will be somewhat limited. Yields are seen to be cooling at the moment.

The fiscal deficit element is the big factor that needs monitoring. Fiscal 2021-22 is a real challenge for the entire banking and financial services industry. Investors, in particular, will actively look for all sorts of calibrations. Expenditure figures and tax collections numbers will be crucial barometers for market participants.

So, given their anticipation, how should investors allocate their surplus?

Clearly, if you are specifically mentioning the strategy for an active investor in the debt market, the choice should be principally short-term funds. All right, I will also add select medium term funds to my basket of preferences. But that will depend on whether the investors concerned have the right sort of appetite, not to mention patience. I must mention here that in the debt market, the longer you stay, the higher is the probability of witnessing volatility and uncertainty. This is a typical phenomenon.

Now, to answer your question in a more specific manner, I will recommend a graded investment strategy in keeping with the investor's risk tolerance. Do not jump into the debt market with everything you have all at once. Take up a staggered exercise instead. Try to avoid interest rate risk as much as possible. An investor should identify a decent range of debt securities, and preferably approach the market through debt funds. Just leave it to a group of professionals to allocate on your behalf. Keep a diversified portfolio by all means, but essentially adhere to shorter term options. The time for long term alternatives are past, at least for the time being. Debt funds, it pays to remember, will still be subject to credit risk. The latter, if it really gets compounded in the days ahead, can play a spoil sport for the investor community.