Mr. Santosh Kamath
Managing Director - Local Asset Management, Fixed Income
Franklin Templeton Fixed Income Group
Franklin Templeton Investments Mumbai, India
Santosh Kamath is Managing Director of Franklin Templeton Fixed Income in India. He oversees the fixed income functions of the locally managed and distributed debt products.
Mr. Kamath joined Franklin Templeton Investments in 2006 and has over 16 years of investment and research experience in the Indian asset management industry.
Prior to joining Franklin Templeton, Mr. Kamath was the CIO at ING Investment Management (India) Pvt. Ltd. Fixed Income, responsible for overseeing Fixed Income Fund Management and managing specific funds. Prior to that, he was fund manager at Zurich Asset Management Company (India) Pvt. Ltd., and he was the head of Capital Market Research at CRISIL Ltd. Prior to that, he was the fund manager at Jardine Fleming India Asset Management Ltd., responsible for Research and managing Indian specific funds and Offshore funds. He was also a fund manager at SBI Funds Management Pvt. Ltd.
Mr. Kamath is an electronics and telecom engineer from REC, Bhopal and holds an M.B.A. from XLRI, Jamshedpur.
Q: What does the GST mean for the debt market in India? Is there any direct, indirect impact on same?
Answer: There have been concerns regarding rise in inflation post implementation of GST rates, though we believe that the impact on the inflation trajectory may not be very significant in the medium-to-long term. Transient rise in inflationary pressures on account of uncertainty regarding GST implementation should settle once the GST is effective and businesses and traders start to accrue the benefits of input tax credit.
Long term impact of successful implementation of GST should favour robust indirect tax collection, thereby taking the pressure off market borrowings. However, state fiscal deficit has been on the rise. Fiscal decentralization would put greater onus on the state governments to manage finances. In the wake of GST implementation, market expects greater number of issuances by state governments to provide for the revenue gap. This along with the existing state bonds and UDAY bonds could harden the yields of state bond issuances.
Q: Will the GST implementation give more room to RBI to reduce interest rates given that it is expected to cut inflation and create buoyancy in the economy?
Answer: Even as the RBI uses CPI inflation as the primary anchor for interest rate decisions, developments in the global economies also contribute to the decisions of the Indian central bank. Globally, central banks are adopting tighter monetary policy regime. This may deter the RBI from bringing down the interest rates too low in the near term. Domestically speaking, inflation is expected to stabilize over the medium-to-long term once the economy smoothly transitions from the previous regime to GST. The GST event may not prompt RBI to cut rates in the near term.
Q:The issue of stressed assets and NPAs is high on the government's and RBI's agenda. For investors, please explain how this issue has been impacting the debt markets and also the Indian economy.
Answer: From the mid of 2000 Indian corporates started increasing leverage for expansion/ asset purchases. Rising balance sheet leverage notably increased the vulnerabilities of Indian corporates to systemic shocks especially post the global financial crisis. With toxic loans at over INR 8 trillion, Indian banks today face heightened levels of stress in their lending books. Inadequate recapitalization of public sector banks just adds to the strain on these banks. The banks have had to step up recognition of NPAs with the Asset Quality Review (AQR) being initiated by the RBI in December 2015. In its Financial Stability Report (Dec-16), the RBI has noted that gross NPAs ratio of scheduled commercial banks rose to 9.1% in Sep-16 from 7.8% in March-16. With most NPAs emerging from the industry sector, banks have started to become increasingly risk-averse to this sector (mostly infrastructure including power and telecommunication sectors) in favour of retail sector. This adverse tilt from industry to retail lending holds potential to stymie the economic growth stimulus. Intensified NPA recognition has also led to higher provisioning by the banks as directed by the RBI, which will likely impact the lending capacity and margins for banks.
After recognition of NPAs, the next step is to strengthen the debt recovery capacity of banks. The ordinance to Banking Regulation Act notified by the government gives RBI the power to tackle specific bad loans and invoke Insolvency Bankruptcy Code against defaulters. With robust institutional mechanisms being put in place to tackle NPA issue, we may expect speedier NPA resolution going forward which is credit positive for banks and the economy.
Q:The INR to Dollar currency has stayed below the Rs.65 mark for few months now after a sharp fall from Rs.68 levels. What according to you would be the right levels at which the INR should stabilise?
Answer: INR has remained range bound due to foreign banks’ dollar sales on the one hand and an uptrend in domestic equities on the other. Moreover, robust FPI inflows have also favoured INR. The INR has appreciated by 5.2% against the USD in YTD 2017. Unlike other central banks, the RBI doesn’t believe in undervaluing the currency to boost exports. Rather it tends to manage the currency’s volatility without targeting any specific level. That said, given the balancing act between domestic and global factors that affect rupee movement, we do not expect the currency to fluctuate too much from the existing range.
Q:What is your duration strategy at this point and how are you playing the markets now?
Answer: Benign inflation, low credit growth, low investment demand for money as well as moderate GDP growth indicate that interest rates should be lowered. However, the RBI has maintained status quo on the rates and it seeks to get a wholesome view of whether the current drop in inflation and event-led changes in the inflation trend are durable going forward. Moreover, the tighter monetary policy regime adopted by the ECB as well as policy normalization by the US Federal Reserve continue adding volatility to the Indian debt markets. Amid these ambivalent trends, we believe that interest rates are bottoming out and rates should begin to trend upwards. This view leads us to play the short to medium duration strategy in our portfolios.
Q:What would be your advice to investors with short, medium and long term investment horizons?
Answer:Global events such as pace of policy normalization being adopted by the US Federal Reserve, fiscal stimulus policies likely to be implemented by the new US government, tighter monetary policy measures being effected by some advanced economies pose risks to the debt capital flows into emerging markets like India. General global risk aversion along with a near bottoming out of domestic policy rates could likely cause further steepness in the yield curve. Hence we believe that the primary focus of the investors should be on protecting downside risk in a rising interest rate scenario. Including accrual strategy in the fixed income portfolio by the way of exposure to managed credit funds operating in the short to medium term maturity space and investing in sub-AAA rated bond segments allows one to part take of the decently high spreads in the corporate bond segment and also lends effective diversification to the fixed income portfolio. The accrual strategy focuses on higher yields and is less prone to the change in the interest rates. This aspect complements the duration strategy thereby ensuring diversification and cushioning for the portfolio from interest rate volatility. Lowering portfolio duration and adding to accrual strategies can provide the requisite downside protection as well as attractive carry to the fixed income portfolio.