Near-term risk on fiscal side remains intact: Upasna Bhardwaj, Kotak Mahindra Bank

Mythili Bhusnurmath, Consulting Editor, ET NOW and Upasna Bhardwaj, Economist, Kotak Mahindra Bank,discuss the Moody’s India upgrade and its impact on Dalal Street and the Mint Street. 

Edited excerpts: 

We are still talking about the upgrade that we saw on Friday from Moody’s and the impact that it has had on the markets and Mint Street. 
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Mythili Bhusnurmath: What is it interesting really is that the rupee is weaker, the bond yield is higher. So clearly markets do not set much score by the rating agencies. Whatever celebrations we may have had in yodelling with champions, walking and popping and all the rest of it, clearly the market is behaving differently. 

Of course, one does not know whether this is temporary or not because there were expectations that whatever euphoria we saw would fizzle out early this week but it has fizzled out much too early. 

Mythili Bhusnurmath: What do you make really of the fact that both the currency and the bond markets do not seem particularly enthused by the rating upgrade? What really is the story? Are we much better than before or is it once again just wishful thinking? 

Upasna Bhardwaj : If we look at Moody’s upgrade and the reasons they have cited for the upgrades, definitely there have been a whole lot of institutional reforms that have been undertaken over the past couple of years and what they are looking for is that in the subsequent few years, we would be seeing a potential growth at a much higher level and that is where they are premising their upgrade too. 

However, if we look at the markets, they have to be convinced that in the near term we absolutely do not have any other risk. 

Mythili Bhusnurmath, Consulting Editor, ET NOW andUpasna Bhardwaj, Economist, Kotak Mahindra Bank,discuss the Moody’s India upgrade and its impact on Dalal Street and the Mint Street. 

Edited excerpts: 

We are still talking about the upgrade that we saw on Friday from Moody’s and the impact that it has had on the markets and Mint Street. 

Mythili Bhusnurmath: What is it interesting really is that the rupee is weaker, the bond yield is higher. So clearly markets do not set much score by the rating agencies. Whatever celebrations we may have had in yodelling with champions, walking and popping and all the rest of it, clearly the market is behaving differently. 

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Of course, one does not know whether this is temporary or not because there were expectations that whatever euphoria we saw would fizzle out early this week but it has fizzled out much too early. 

Mythili Bhusnurmath: What do you make really of the fact that both the currency and the bond markets do not seem particularly enthused by the rating upgrade? What really is the story? Are we much better than before or is it once again just wishful thinking? 

Upasna Bhardwaj : If we look at Moody’s upgrade and the reasons they have cited for the upgrades, definitely there have been a whole lot of institutional reforms that have been undertaken over the past couple of years and what they are looking for is that in the subsequent few years, we would be seeing a potential growth at a much higher level and that is where they are premising their upgrade too. 

However, if we look at the markets, they have to be convinced that in the near term we absolutely do not have any other risk. 

If we look at the bond markets, they of course rallied immediately after the news and then retraced completely back to close somewhere close to 7.05% or so. The reason is that the near-term risk on the fiscal side still remains intact. Of course, we cannot deny that all the reforms on the GST have been undertaken and eventually we will be seeing formalisation of the economy. 

We will be seeing expansion of the tax base and hence the government revenues are going to improve. But, near term what is happening is there are whole lot of risks and that is where the market focuses. There is some uncertainty in terms of GST related revenue collections. We already know that there is a shortfall in RBI dividend. There is also an excise duty cut on petroleum products because of which there is a further shortfall. The government has already front loaded its expenditure as much. All in all, there is a risk of more supply coming in and to add to that until Friday, we had ongoing process of OMO sales. So, there was excessive supply concerns which concerned the markets. 

Now with the cancellation of the OMO sale, somewhere markets are relieved that there will be less and less OMO sales. That means, clearly some kind of supply concern has faded and we are again seeing improvement in the sentiment in the bond market. 

Mythili Bhusnurmath:Late last week.we saw Reliance Communications default on interest payment for international bonds that they had raised. That sent the first shiver through corporate bond market saying that ultimately when corporates default — whether it is through banks or corporate bond markets — the records that are available to lenders is very limited. Is this going to be a first sign that the corporate bond market is not all that has been made out to be and FPIs will perhaps think twice before they rush into corporate bonds? 

Upasna Bhardwaj: The moment the G-sec limits open, we will see them getting lapped up much faster than the corporate bonds. But having said that, if long-term benefits of the India story remains intact, until the G-sec limits are not open, we will continue to see interest in corporate bonds as well. Like you said. corporate bond limits are also mostly exhausted. There is so much more flows that we can get but having said it, I agree that given the kind of excessive leverage of our corporate sector, clearly there is a severe risk as we go forward. 

On the positive side, there has been a fair amount of deleveraging taking place. A lot of corporates have been deleveraging and trying to wind up their non-core sectors assets and hence if the deleveraging which has already been witnessed in the last six to 12 months continues on an ongoing basis, that should at least provide some kind of support as we go forward. 

Mythili Bhusnurmath: Exactly 10 days from now, we will get the GDP numbers for the second quarter. What are your expectations from that number and do you think they will also rebuff the Moody’s upgrade as we saw in the cases of the bond and the currency markets? What kind of numbers are you expecting — plus 7% or less than 7%? 

Upasna Bhardwaj: Currently for our second quarter estimates, we have closer to 6.3% as GVA numbers as against the 5.6%, so definitely there has been a significant upmove. 

From July to September, we have seen a fair amount of improvement in the high frequency data. It is not just the services, but even within industry if we look at the IIP data, there has been some kind of stability. All in all, there should be an improvement over the first quarter which means growth has definitely troughed and a significant improvement towards the 6.3% range but definitely not 7%. 

Mythili Bhusnurmath: Do you expect a revival in manufacturing which really the problem area because jobs are going to come from manufacturing? Where do you think this recovery is going to come from — manufacturing or from services? 

Upasna Bhardwaj: Services will continue to provide the fillip but at this point in time, incrementally, manufacturing is expected to gradually start contributing more and more to growth. Otherwise, given that private investment is completely missing from the growth story that we are talking about, it remains a point of concern given that capacity utilisation still remains between 70 and 72% for the manufacturing sector. 

We still have a long way to go before which we can really see manufacturing on a sustained basis contributing to overall growth. At this point, it is going to see a marginal and a gradual improvement in manufacturing but not the V-shape recovery that we are hoping for.

If we look at the bond markets, they of course rallied immediately after the news and then retraced completely back to close somewhere close to 7.05% or so. The reason is that the near-term risk on the fiscal side still remains intact. Of course, we cannot deny that all the reforms on the GST have been undertaken and eventually we will be seeing formalisation of the economy. 
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We will be seeing expansion of the tax base and hence the government revenues are going to improve. But, near term what is happening is there are whole lot of risks and that is where the market focuses. There is some uncertainty in terms of GST related revenue collections. We already know that there is a shortfall in RBI dividend. There is also an excise duty cut on petroleum products because of which there is a further shortfall. The government has already front loaded its expenditure as much. All in all, there is a risk of more supply coming in and to add to that until Friday, we had ongoing process of OMO sales. So, there was excessive supply concerns which concerned the markets. 

Now with the cancellation of the OMO sale, somewhere markets are relieved that there will be less and less OMO sales. That means, clearly some kind of supply concern has faded and we are again seeing improvement in the sentiment in the bond market. 

Mythili Bhusnurmath: Late last week. we saw Reliance Communications default on interest payment for international bonds that they had raised. That sent the first shiver through corporate bond market saying that ultimately when corporates default — whether it is through banks or corporate bond markets — the records that are available to lenders is very limited. Is this going to be a first sign that the corporate bond market is not all that has been made out to be and FPIs will perhaps think twice before they rush into corporate bonds? 

Upasna Bhardwaj: The moment the G-sec limits open, we will see them getting lapped up much faster than the corporate bonds. But having said that, if long-term benefits of the India story remains intact, until the G-sec limits are not open, we will continue to see interest in corporate bonds as well. Like you said. corporate bond limits are also mostly exhausted. There is so much more flows that we can get but having said it, I agree that given the kind of excessive leverage of our corporate sector, clearly there is a severe risk as we go forward. 
On the positive side, there has been a fair amount of deleveraging taking place. A lot of corporates have been deleveraging and trying to wind up their non-core sectors assets and hence if the deleveraging which has already been witnessed in the last six to 12 months continues on an ongoing basis, that should at least provide some kind of support as we go forward. 

Mythili Bhusnurmath: Exactly 10 days from now, we will get the GDP numbers for the second quarter. What are your expectations from that number and do you think they will also rebuff the Moody’s upgrade as we saw in the cases of the bond and the currency markets? What kind of numbers are you expecting — plus 7% or less than 7%? 

Upasna Bhardwaj: Currently for our second quarter estimates, we have closer to 6.3% as GVA numbers as against the 5.6%, so definitely there has been a significant upmove. 

From July to September, we have seen a fair amount of improvement in the high frequency data. It is not just the services, but even within industry if we look at the IIP data, there has been some kind of stability. All in all, there should be an improvement over the first quarter which means growth has definitely troughed and a significant improvement towards the 6.3% range but definitely not 7%. 
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Mythili Bhusnurmath: Do you expect a revival in manufacturing which really the problem area because jobs are going to come from manufacturing? Where do you think this recovery is going to come from — manufacturing or from services? 

Upasna Bhardwaj: Services will continue to provide the fillip but at this point in time, incrementally, manufacturing is expected to gradually start contributing more and more to growth. Otherwise, given that private investment is completely missing from the growth story that we are talking about, it remains a point of concern given that capacity utilisation still remains between 70 and 72% for the manufacturing sector. 

We still have a long way to go before which we can really see manufacturing on a sustained basis contributing to overall growth. At this point, it is going to see a marginal and a gradual improvement in manufacturing but not the V-shape recovery that we are hoping for.

Source: Greater Kashmir