BackRajan tackled inflation in an appropriate manner
UTI Mutual Fund's Sudhir Agrawal talks to Mint about interest rate trajectory, and possible stance of the new RBI governor
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With the Reserve Bank of India (RBI) about to see a new governor soon, equity and debt markets have started speculating the name of the person who will come after the outgoing governor, Raghuram Rajan. And with it come guesses on whether the new governor will cut interest rates or not. Mint caught up with Sudhir Agrawal, fund manager and executive vice-president at UTI Asset Management Co. Ltd, to find out his thoughts on this. Agrawal has been the fund manager of UTI Short Term Income Fund, which is part of the Mint50—Mint’s curated list of 50 mutual fund schemes. Edited excerpts:
Do you think the slow pick-up of credit growth is a worry? Or is this a passing phase?
A lot of the so-called high credit growth we saw in the past has now turned into non-performing asset (NPA). This problem is acute in the case of public sector banks, probably because they had stiff targets earlier to grow their balance sheets in terms of deposit and credit growth. They were more aggressive in lending and ignored credit rating standards. That is probably one of the reasons why there was high credit growth in the past.
Considering the kind of NPAs banks have seen, ideally they should be more careful in lending. There will now be more focus on quality of debt; banks will only lend after assessing the borrower’s cash flows more thoroughly. So, credit growth will improve, but not to the extent we saw till a couple of years back.
Do you agree with the clean-up process of banks’ books that the RBI initiated last year?
I agree with what RBI had done, because how long will we (the economy) carry this burden, and how long will the banks hide asset quality…. This (asset quality) would have eventually come out. Hopefully, the clean-up will happen, and banks will get the additional capital. But this time around, banks will be more comfortable lending to companies that they think are fundamentally strong.
RBI governor has cut interest rates in a measured way. Critics say he should have been more aggressive. Where do you stand?
The problem of inflation has been persistent for years. We used to look at the Wholesale Price Index (WPI) inflation, which was not the proper way. It was important to set the expectations right at the consumer level. By targeting the Consumer Price Index (CPI) inflation, Rajan has set the inflation expectations right. Process of targeting CPI is a slow one where you just cannot, at one go, cut interest rates drastically.
Rajan did the right thing; though he loosened the monetary policy, he did it in a limited manner so that an asset bubble was not created and people were not motivated to consume beyond their means. He has been appropriate to tackle the problem of inflation.
CPI and WPI inflation inched up in April, partly due to a rise in food prices, and partly due to bad monsoons for the past two years. Is there a concern on the inflation front?
Inflation in general has moved up significantly over the past 2-3 months, primarily due to increase in food prices. A good progress in monsoon this year brings some hope of food prices cooling from here. Strong global disinflationary trends have contributed meaningfully to the fall in Indian inflation over the past two years. But we have to look at the incremental sources of global disinflation from current levels to sustain the last 1-2 year downward trend of CPI and WPI. We should also monitor the impact of the 7th Pay Commission after its full implementation, as it may have a significant impact on overall demand.
Do you think the new regime at RBI would be able to carry forward policies that Rajan had said?
Market expectations are that whosoever is the new RBI governor, he or she might take a more dovish (prone to cut interest rates) stance than Rajan. However, with the monetary policy framework in place and the inflation targeting regime already in motion, there is limited scope for the new governor to deviate from the mandate that has been set. But I will say that there is some scope for finding that extra space, a minor cut of, say, 1-2%, if the person is not as hawkish (prone to not cutting interest rates), or rather, more on the dovish side.
The mandate to target inflation has to be followed. As long as that happens, these kinds of reforms will continue. But the new person should not be too lenient on the inflation front. From the names that have appeared in the media and in fixed income markets as to who could replace Rajan, a couple might be more bullish, who might put more focus on growth rather than immediate inflation. If that kind of a person is the new governor, then it might create some concern in the medium term. In the immediate term, markets might be happy. But from the logical expectation that prevailed in the market—of “no rate cut to one rate cut"—before Rajan announced his departure, it has now probably changed to “maybe one to two more rate cuts".
What kinds of securities are you more comfortable with when you manage the UTI Short Term Income Fund?
We avoid credit exposures. We restrict it mostly to AAA-rated portfolios. We sometimes invest 10-15% in the AA+ segment if they are of good quality companies.
But you used to pick up slightly lower rated scrips as well.
We used to look at such companies before, but our institutional investors gave us feedback that they were not comfortable with us taking credit risks. In our short-term bond fund, we have retail as well as large institutional clients. The latter had a problem after some incidents took place in the mutual funds industry and which were highlighted because of low credit exposures.
I felt the fear (in credit as far as mutual funds’ investments were concerned) was a bit exaggerated, because what had happened was that a couple of companies didn’t do so well and we just generalised that on all non-AAA rated companies. After the scare in Amtek Auto Ltd, people turned so bearish that they just wanted to avoid all non-AAA companies. They just wanted AAA rated companies.
The truth is that at any point in time, you will find well-managed non-AAA names that can be picked up and where there is a good possibility of a credit upgrade. What happened, on the other hand, was that despite knowing of such companies, we couldn’t pick them up because of investor concern.
Have you increased your exposure to government securities of late on the back of expectations of rate cuts?
We increased our exposure to government securities recently. From an average maturity of 2.5 years, our short-term bond fund’s exposure has gone up to 3.5 years. It is quite possible that if the new governor is not as hawkish as Rajan, there can always be room, even if it is small, to cut interest rates.
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