There has been a cascading impact of the IL&FS crisis and now investors are trying to re-evaluate every single credit in the portfolio. Each and every investment is now being questioned, Mahendra Jajoo, Head – Fixed income – Mirae Asset Global Investments, tells ET Now.
Edited excerpts:
What do you make of the recent risks arising out of the IL&FS issue? How grave is the situation and how does one measure the domino effect it can have since there are so many linkages out here?
IL&FS is something which no one was expecting and it is a very shocking event. The majority of the IL&FS debt exposure is with the banking sector and the mutual funds have small exposure, the numbers we get is about Rs 2,700 crore, but there is a lot of unease in the market. As you said, there is a cascading impact and now the investors are trying to re-evaluate every single credit in the portfolio. So, each and every investment is now being questioned. People who are unsure, people who are panicking want to exit and mutual funds provide the easiest and safest exit to the investors. Therefore anyone who is a little bit panicky wants to just get out. There was a stampede kind of a sentiment last week but as more and more information is available, calm is returning to the market.
There are two main contributors to a sense of stability in the market; first, the companies which were under conversation last week. For example, DHFL got their credit rating reaffirmed over the weekend. They opened up their ALM book to the public at large for them to understand what kind of liquidity they have in their books and what is their plan for meeting the redemptions that may come if the funding becomes a bit of a challenge.
Secondly, the regulators; the Reserve Bank and the Securities Exchange Board as also the Finance Ministry issued strong statements of intent that they are willing to step in and intervene as and when required. The Reserve Bank made the open market purchase announcement yesterday evening just back to back after one which was conducted on Friday. The message that one should get is that there is need to be cautious, there is a sense of unease and panic in some segments of the investors but perhaps it is a little bit overstretched. We need to divide it into two parts. The equity correction needs to delinked with the panic in the debt market. I believe the mutual fund portfolios are by and large invested in very high quality companies.
The mutual fund industry has a limited exposure, not even a billion dollars but IL&FS book is over Rs 1 lakh crore. Whether liquid funds take a hit, whether mutual funds take a hit or whether the government institutions take a hit, someone is going to take a haircut and that is bad for everyone. What is your view?
Yes, that is true. Over the last few years, we have had NPAs as the central theme and that is why we see the PSU banking sector a bit paralysed. Not much of credit offtake is happening and the valuations are not looking good either. There was a stage about a couple of months back when the market started feeling that perhaps the NPA story is settling down and people are beginning to build in expectations of a strong recovery from the PSU banks.
Now we see this as a completely unexpected, out-of-the-blue event where one of the supposedly blue chip company with very strong shareholders is going through a very difficult phase. It upset all the expectations and primarily the banks will have to take the hit because they are the primarily lenders and the shareholders will have to take a hit because their equity value will be eroded.
From a larger perspective, it again throws up a challenge as to where do you expect this thing to end and which is the next one. That is where the doubts arise and that leads to suspicion on each and everything that you own.
How do you look at the liquidity environment within the bond market at a time when the US is expected to hike rates this week. Then the dot plot is indicating one more or fourth rate hike in December as well?
Globally, liquidity is shrinking and even it were to stop at one more rate hike in the next policy, their balance sheet shrinking programme is going to continue and they will step it up to $50 billion a month starting from the next quarter. So the global liquidity continues to shrink. The ECB has already hinted at stopping their incremental quantitative easing from the beginning of the year.
Domestically, our systemic liquidity is already negative in excess of Rs 1 lakh crore and therefore we should expect the current liquidity situation to continue to be tight. RBI currently has a neutral liquidity stance which means that this kind of a negative liquidity will induce action from the Reserve Bank to inject liquidity and we have seen Reserve Bank do a number of repo auctions this month and then they have done two OMO purchases.
Is that enough for now? Normally, it would have been enough but there is incremental panic because of the debt market upheaval and everyone is trying to find a way to take money out and park it in some safe place. But there are two parts; the structural liquidity in the system which is getting in the deficit mood because of the global events and the local macro factors that is something which is structural. Right now, there is a kind of a panic situation which is settling down is not a big issue in my view.
What could spook the bond market from here? Today, bond yields are not going to 9.5% or 10% and the call money rates are not at 10-12%. They are still at 7.5 to 8%. What could crush the yields and spook the markets?
Oil is the biggest swing factor because if you look at multiple macro parameters like the current account deficit or the fiscal deficit or inflation, the cascading impact of oil is just too wide. Oil is now crossing $80. Today it is at a four-year high and now the expectations are building up of oil going towards $100 that cannot be positive for the domestic yields.
The only consolation factor is that everyone knows that oil is going up and the current account deficit is widening. Maybe that is priced in in the current set of yield that we have which is 10-year at around 8.20%. But there is a structural change. The liquidity at the structural level is shrinking. We have discussed how the NBFC may face higher spreads and narrower refinancing windows going forward.
If oil is going to go to $90, then as you rightly said, we should expect yields to go up, there will be interventions from the regulators and there will bargain hunting but still directionally, we should expect the yields to head higher as long as the oil does not show any signs of moderating.
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