Mr. Murthy Nagrajan

Head - Fixed Income, Tata Asset Management Limited

Nagarajan Murthy is the Head of Fixed Income at Tata Asset Management. With an expertise spanning decades in the debt market, Murthy brings in a rich and valuable industry experience of more than 20 years in the financial services space. Prior to his appointment at Tata Asset Management, Murthy was working with Quantum AMC. He was also associated with Mirae Asset Global Investment India Ltd in the Investment Department as the Head of Fixed Income for more than two years. Murthy holds a Master of Commerce degree and has completed his PGDBA from Somaiya Institute of Management & Research.

Q. It will soon be an anniversary since the demonetisation plans were announced. How should we evaluate the success of the demonetisation today? What has been its impact on the debt market and the overall economy, especially the black economy?

Answer: Demonetization exercise had following main objectives: to track fake currency in the system, to cut-off the supply chain of terrorism financing, to push towards a less cash economy, and to unearth and curb the black money. The economy had some short term pain due to this measures as the Indian Economy has a large informal sector which witness some disruptions due to the these measures.

Although it is difficult to say how much of black money was unearthed, demonetization certainly enabled government in linking that cash with bank accounts and pan cards and this would mean that the government can expect to see the benefits of taxation on previously hidden black money over the coming months and years. Further India's finance ministry says it is probing 1.8 million bank accounts where cash inflows during the demonetization period "did not appear in line with its tax profile," meaning it can expect some belated tax payments. There are also long-term benefits from demonetization in terms of increasing income tax payments going forward and encouraging the use of digital payments over cash. All this would encourage better tax compliance among businesses. On the electronic transactions side, RBI data says that electronic payments witnessed a surge of 30+%, both in terms of volume and value, between Nov-2016 to Sep-2017.

Demonetization exercise had flooded the banking system with deposits and thereby increasing systemic liquidity. This surplus liquidity into the system pushed fixed income yields lower. Further, bond market participants started expecting aggressive monetary easing from RBI to compensate for the growth shock due to demonetization, but those expectations were short lived as RBI changed stance to Neutral in February 2017 policy and termed impact of demonetization on economy as transient. Demonetization did lead to a slowdown in growth which is evident from Q4-FY2017 GDP numbers.

Q. While the traditional businesses have been disrupted due to GST, imports have surged to meet the domestic consumer demands, widening trade deficit and cutting GDP growth. In your view, how serious is the situation and how long will it take for the domestic industry to revive?

Answer: We feel that all the high frequency indicators are suggesting that revival has already started. Sales of two-wheelers, commercial vehicles and tractors, power generation, steel production, airport traffic and fund-raising from equity markets by businesses are reporting faster growth in last two months. Index of Industrial Production (IIP) also showed a modest rebound by coming at 4.3% YoY aided by broad-based improvement in nearly all sectors. The trade data also delivered a positive surprise in September with trade deficit contracting sharply. Encouragingly, exports grew at a healthy rate for second consecutive month with 87% of the exports basket registering a positive during September. The GST related hiccups that were weighing on the exports sector appear to be withering away. Exports excluding petroleum products too have risen drastically; indicating that the rise in exports is not just a result of price effect.

Our view is broadly in line with that of RBI’s, GDP growth rate has bottomed out and we should see uptick in coming quarters.

Q. On of the challenges facing country is the NPA issue in banking industry due to which financing for big projects is constrained. While the government has been making policy level efforts, things are yet to improve noticeably. What is your assessment of the current situation?

Answer: The problems of the banking system has got to do with the unrealistic projections of the company management, government clearance not being fully obtained before disbursement of loans, global slowdown and protectionist policy policies being pursued in advance economies. The government sticking to its FRBM targets has reduced the ability of the government to pump prime the economy. The NPA resolution is expected to improve with RBI trying to resolve the NPA problem in a time bound manner. The introduction of Insolvency and Bankruptcy Code should see faster resolution of these problems. However, the situation should improve going forward as the temporary effects of GST and demonitisation fades away and GDP growth accelerates to 7- 8% levels.

Q. What are your views on the present fixed income markets? In which direction do you see the yields moving in near to mid-term and why?
Answer: Unlike in past when RBI used to look at wide set of data points, currently RBI has a formal inflation target. Urijit Patel in its latest interview has also reiterated this point by hinting that inflation is the paramount objective– “we should aim at achieving the inflation target without losing sight of supporting economic growth”.

Although September CPI print at 3.28% (against market consensus of around 3.5%) surprised a bit on the lower side and there are visible efforts from the government side in bringing inflation under control (revised rates of GST for certain items, excise cut in petrol and diesel), core inflation is still at 4.5+% level. We feel that RBI’s inflation target of 4% basically means bringing core inflation at 4% and allowing volatile components like food & fuel to use the +/-2% band. As of now, we believe the CPI is expected to undershoot RBI’s forecasts by about 25-50bps, but we have our doubts on whether RBI will use that room to deliver more rate cuts. A headline CPI print below 3.0% with core CPI coming around 4.00% can create a strong case for further rate cuts. But having said that there is also fear of fiscal slippage in current year and this will also deter RBI from delivering monetary easing. We expect 10-year G-Sec benchmark to trade in 6.60%-6.80% range, which can shift to 6.75%-6.90 % if risks from fiscal side materializes. At the yield in which the ten year is trading, there is an expectation of Rs 50000 Crores of slippage, if the government sticks with its fiscal deficit target we should see the ten year yields moving down to 6.65 % levels and if the government borrows more than Rs 50000 Crores, yields may move up to 6.90 % levels.

Q. What has been your duration / investment strategy your funds in general? 
Answer: We had consciously reduced duration in our funds post August monetary policy. We believe that with RBI downplaying recent slowdown in GDP growth and instead highlighting high frequency indicators to show pick in growth, there will be limited scope for rate cuts going forward. We see a range bound market in coming months and in such an environment a high duration strategy may not generate alpha. Also with supply pressure emanating from RBI OMOs & likelihood of fiscal slippage, we have adopted a defensive strategy for coming months. We will revisit this strategy after we get more clarity on government’s fiscal stance in this year.

Q. What would be your advice to investors looking to invest in debt funds? Which category of debt funds would you suggest for investment with time horizons of (a) up to 1year (b) between 3 to 5 years and (c) beyond 5 years?

Answer: For up to 1 year, one can look at Ultra short term category (Tata Ultra Short Term fund and Tata Corporate bond fund). For a horizon between 3 to 5 years and given the fact that we are at in a later stage of rate cutting cycle we recommend short term bond fund category. And for a relatively long investment horizon, we believe that investor should focus on dynamic category and GILT category as these two categories tend to outperform other debt fund categories over a long period.

Disclaimer: The views expressed are of Tata Asset Management Ltd. and are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed may not reflect in the scheme portfolios of Tata Mutual Fund.

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