Mr. Dhawal Dalal, Edelweiss MF
With over 20 years of experience and an MBA from University of Dallas (USA) in 1996, meet our CIO of Fixed Income Asset - Mr Dhawal Dalal.
Dhawal has joined Edelweiss Asset Management Limited in the year 2016. He is responsible for the overall growth of fixed income assets through a healthy mix of retail and institutional clients.
Q: The RBI has reduced the rates for the fifth consecutive time which now stands at 5.15%. What is your view?
Answer: We expect the RBI to maintain easy interest rate and easy liquidity stance going forward until the economic conditions stabilise. India’s economy has been slowing at a faster pace due to a combination of structural and cyclical factors. We believe these conditions can be arrested by a combination of fiscal and monetary stimulus. The government has already provided a supply-side fiscal stimulus in form of tax cuts. The RBI had cut the Repo Rate by 135 basis points in 2019. We expect the RBI to cut the Repo Rate further by at least 25 basis points by March 31, 2020 and focus more on transmission on rate cuts going forward.
Q: The government and the RBI have been taking a lot of steps. Do you feel that they are doing enough and if this is the right way to move forward?
Answer: The need of the hour is to stimulate the demand-side of the economy. The government and the RBI have been working on the supply-side of the economy in the last six months through measures such as tax cuts, making credit availability easier through improving banking system liquidity, linking of housing loans to external benchmarks, offering partial guarantee schemes etc. However, consumption-led indicators are still showing relative weakness. We reckon that the government will have to put fiscal deficit concerns on the side and address demand-side issues of the economy before it is too late.
Q: Has the liquidity and credit scenario improved in the economy after the PSU bank got capitalised? How long do feel it will take for corporate borrowings to return to normal flows?
Answer: There is relative improvement in banking system liquidity since May 2019. Before that, India’s banking system liquidity was in deficit mode for quite some time. With the RBI becoming comfortable with the inflation and its outlook going forward, their stance on banking system liquidity has changed towards surplus. Having said that, PSU banks have also become cautious in the current market environment. They are now seeking better collaterals, higher security covers and credit enhancements etc. in order to protect them from any unwarranted developments. Recently published RBI data has inferred that there has been a huge contraction in credit disbursement in the first-half of FY20 as compared to the same period last year. Many people have begun to describe this as “crisis of confidence” in the system. We believe that this pain is likely to last at least till the end of the financial year before things will improve from hereon.
Q: Do you now feel that the NPA crisis which was plaguing the economy in last few years is now largely behind us?
Answer: Quarterly financial statements from PSU banks suggest that fresh increase in non-performing assets have declined. At the same time, recoveries are taking place in some cases. These measures along with infusion of capital has helped bring some investor confidence in public sector banks. We expect that India’s banking system to remain healthy going forward and help cushion the present economic downturn through easy availability of credit to worthy borrowers.
Q: There are renewed worries on falling GST collections and fiscal deficit figures for this year. What is your opinion on this front?
Answer: Falling GST collections are symptomatic of lower levels of economic activities. Lower GST collections in September 2019 for economic activities in August seems to suggest that traders and manufacturers are bracing for lower-than-expected demand from festival season sale starting September. This is quite concerning. On top of that, India’s fiscal deficit will likely increase due to recent cut in tax rates. This will likely result in higher borrowings from both centre as well as states. However, it must not be forgotten that our priority is economic revival and not fiscal prudence. Based on these, we are bracing for some fiscal slippage as it is required remedy to cure our current economic malaise.
Q: Can you explain to our readers what is a side-pocket and how it works for investors?
Answer: Side pocketing, also known as creation of “a segregated account” is a process which may be used in case of any “credit event” in the portfolio. In case of a credit event – a downgrade below investment grade, non-receipt of scheduled maturities, etc, - SEBI guidelines allow mutual funds to create segregated accounts within T+1 business day of the event and transfer the affected asset into the newly created account. Existing investors will get proportionate units of the newly created segregated account in such a way that their total investment value will remain unchanged between the main portfolio account (without affected asset) and segregated portfolio account (with affected asset).
Creation of segregated account has several benefits for existing investors in our opinion. They can continue to invest or exit in the main portfolio account uninterrupted. At the same time, all existing investors on the date of creation of the segregated account get to participate in the recovery of the affected asset even if they are no longer investor in the main portfolio account at a later date. This feature provides flexibility to investors.
Q: What are the opportunities you see for investors in the current debt markets for medium and long term investment horizons?
Answer: We continue to remain constructive on liquid and high quality, long maturity bonds at current levels. Our assessment of the global macro-economic landscape suggests emergence of three powerful trends – changing demographic profiles, subdued economic growth and absence of inflationary pressures in global markets. As a result, we believe that central banks will have to keep supporting the economies through higher level of liquidity and soft interest rates. These developments are bullish for bonds as demand for high quality bonds will outstrip supply. We also expect India’s financial markets to experience the same in the medium-term. Based on these, we suggest investors to focus on investing in funds with higher exposure to liquid and high quality long maturity bonds with investment horizon of at least five years for superior tax-adjusted returns.
Disclaimer: Mr. Dhawal Dalal is the CIO – Fixed Income of Edelweiss Asset Management Limited and the views expressed above are his own.
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