India much better placed now than in 2013 to survive taper: Puneet Pal, head – fixed income, PGIM India Mutual Fund

India is in a much better position now than it was in 2013 when the taper tantrum hit the markets, thanks to higher forex reserves and the RBI’s explicit inflation controlling mandate, says Puneet Pal, head – fixed income, PGIM India Mutual Fund, in an interview with Manish M Suvarna. Excerpts:

Given the volatility in Brent crude oil prices, how do you see inflation numbers in coming months, and will the RBI revise its estimate upwards?

In the April policy, the RBI is likely to revise its inflation forecast upwards, but it depends upon how much they revise it. With volatility in oil prices and if they continue to hover around $100 a barrel, the RBI will have to revise higher its inflation forecast. The government has not revised fuel prices in the past few months. So, we need to see how much the government will absorb by way of cutting the excise duty and how much will it pass on.

In the current scenario, considering the geopolitical tension and its implications on the Indian economy, do you think the RBI will consider rising rates in the next policy or change the stance from accommodative to neutral?

We don’t think the RBI will change its stance or rates in the April policy, because the RBI was pretty dovish in the last policy. Even if we see the recent comments by MPC members, including Michael Patra and Ashima Goyal, they were not unduly concerned about the spike in oil and commodity prices. Hence, we do not think there will be any change in the monetary stance or policy rates. The RBI may increase the inflation forecast, and continue to maintain an accommodative stance. However, if commodity prices remain elevated, there may be a change in both stance and rates in the June policy.

How will the end of the cheap money era impact emerging economies like India?

Emerging economies like India will face some volatility. But we do not expect the kind of volatility that we saw in 2013 during the taper tantrum as the fundamentals of the Indian economy in terms of macroeconomic variables are much stronger now.

How is India’s external sector and can it survive the taper?

We are in a much better position now than we were in 2013 when the taper tantrum had affected Indian markets. Forex reserves are high and the RBI has an explicit inflation controlling mandate. Given our relative macroeconomic variables are much better now, we should not have too much of an issue even though central banks across the globe, especially the US Fed, may start reducing their balance sheet along with rate hikes.

How will India’s growth be impacted given the slowdown/stagflation in Europe and other parts of the world?

Currently, we are not expecting a stagflation kind of a scenario. If geopolitical issues linger on and commodity prices stay elevated, the narrative of stagflation can take hold, but as of now, it is not our base case scenario. India’s growth can be impacted through the trade channels and if Brent crude and commodity prices stay higher, we may see some impact on growth and inflation.

There is volatility in rupee due to global cues. Do you think it will continue and the rupee will depreciate further?

Some volatility will definitely be there given the uncertain geopolitical scenario and elevated commodity prices, particularly since India is a net importer of commodities. But if we look at the last 3/4 months’ trend in the rupee, it has not done badly even after selling by FPIs. The rupee has depreciated 1.63% YTD against the dollar but we have not seen any major volatility or significant depreciation pressures like we saw in 2013 (7%-10%), given high forex reserves, which provide a decent cushion to the RBI to intervene and control volatility.

Where you see benchmark yield in FY23, given the higher borrowing announced by the government? And how much demand will green bonds get from domestic investors?

Over the next 3-4 months, we expect the benchmark 10-year GSec yield to range between 6.75% and 7.25%, and it may not go beyond that because both the RBI and the government are managing yields in an active manner. On green bonds, we are still awaiting clarification on quantum and the methodology of issuance.

How you see FPIs flow in Indian debt market considering the expected rate hike by the Fed and high US inflation numbers?

Inflation in the US is pretty high and the Fed is expected to hike rates, so we don’t expect much FPIs inflows into the Indian fixed income market. Last year, inflows were negative, and this year too, they will be less given other central banks are raising interest rates while the RBI is expected to hike rates only gradually.