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Economic Times
03-07-2025
- Business
- Economic Times
ETMarkets Smart Talk - FPI outflows from Indian bonds likely tactical profit booking, says Puneet Pal of PGIM India AMC
Agencies This could very well be a case of profit-taking, and also the fact that the US-India interest rate differential has narrowed, leading to some capital reallocation. In this edition of ETMarkets Smart Talk, Puneet Pal, Head of Fixed Income at PGIM India AMC, addresses the recent $2 billion FPI outflows from Indian fixed income markets in June. Despite strong macroeconomic fundamentals and steady returns from Indian bonds over the past two years, foreign investors have begun paring their exposure. Pal believes this trend is largely driven by tactical profit booking and narrowing interest rate differentials between India and the US, rather than any structural concern. He explains why India's bond market remains fundamentally strong and why these outflows shouldn't raise red flags for investors. Edited Excerpts – Kshitij Anand: Let us start with the corporate bond segment. Why is the three- to six-year corporate bond segment seen as an attractive investment opportunity right now? Puneet Pal: We see the three- to six-year AAA PSU segment as an attractive opportunity simply because we foresee that there will not be any rate cuts over the next six months, at least until December. The RBI has indicated that there is limited room for monetary policy to support growth going forward, and they changed the monetary policy stance to neutral from accommodative in the June 6 policy. This makes us believe that there will be a status quo on policy rates, limiting the duration play in terms of overall returns from a fixed income perspective. This makes accrual an attractive opportunity. When we talk about AAA spreads, they are currently around 60 to 70 basis points over corresponding maturity G-Secs, which I would say is a pretty decent or attractive spread. Historically, in a rate-cutting cycle followed by abundant liquidity in the banking system, we have seen the spreads compressing to around 40 basis there is still some scope for the spreads to come down, which can lead to better returns. That is why we see this three- to six-year segment in the AAA PSU space as a better risk-adjusted investment opportunity. Click Here for Livestream - Why FPIs Are Selling Indian Bonds Kshitij Anand: You did mention that the RBI is probably not cutting rates anytime soon, but are there any other reasons why the current spread between AAA PSU bonds and G-Secs is historically attractive? Puneet Pal: Yes, because the RBI has committed to maintaining adequate and surplus liquidity to the tune of 1% of the means that liquidity in the overall banking system should be in excess of ₹2.5 lakh crore, which is a trigger for the spreads to come down over a period of time, as money will follow higher that AAA PSUs in the five-year space are trading anywhere between 6.75% to 6.85%, and the corresponding G-Sec yields of the same maturity are around 6.10% to 6.15%, it makes sense that one can enjoy a higher accrual as the rate cuts take a the high accrual will lead to higher returns, and if there is spread compression — which we do expect over the next two quarters — that will add to the higher accrual. Kshitij Anand: You talked about the liquidity the RBI is going to maintain, but how does the RBI's stance on liquidity and rate transmission influence short-term bond investment strategies? Puneet Pal: We have already seen banks reducing their loan rates as well as deposit rates, so rate transmission is happening. It is crucial for the RBI to maintain this excess liquidity for rate transmission to continue, which is why the RBI is committing to maintaining surplus liquidity in the banking we look at the durable system liquidity, which includes government balances, it is currently in excess of ₹5.5 lakh and when government spending picks up, we are likely to see more liquidity flowing into the system, which means that rate transmission through banking channels will gain further momentum. Kshitij Anand: Now, in case someone is interested in investing right now, what kind of investment horizon would you recommend for those looking to allocate to short-term or corporate bond funds at this point in time? Puneet Pal: We would definitely advocate that anyone investing right now should do so with a minimum horizon of 12 to 18 months. That is the bare minimum one should keep in mind when investing in short-term or corporate bond we talk about better accruals or spread compression, one needs to stay invested for at least 12 to 18 months to fully benefit from that. So, I would recommend a 12- to 18-month investment horizon for short-term or corporate bond funds. Kshitij Anand: Let me also get your perspective on what's happening on the international front. How have global central banks—like the US Fed or the Bank of Japan—responded to the recent geopolitical uncertainty? We've seen the US Fed holding off on rate cuts while the BOJ has slightly raised interest rates recently. How are you interpreting all of this? Puneet Pal: That's a very pertinent question, and it's going to remain relevant for the foreseeable future. I would say that every central bank is primarily reacting to its domestic inflation and growth example, in India, the RBI has emphasized that its monetary policy decisions are mostly driven by domestic factors—specifically, the growth-inflation is also true for other central banks, like the US Fed and the BOJ. In Japan, inflation has risen after a long time, and their withdrawal of accommodation—through rate hikes or reduced bond purchases—is a response to that higher in the US, we are seeing relatively strong economic growth, and inflation is not yet coming down to the Fed's target. This is why the Fed has not cut rates in the current calendar year, although they did cut rates last are waiting for more subdued inflation before embarking on another rate-cutting cycle. While the Fed is projecting more rate cuts ahead, we will have to wait and see how the growth-inflation dynamics evolve in developed to directly answer your question: every central bank is focused primarily on its domestic growth and inflation dynamics. While they are also monitoring geopolitical developments, those tend to take a foremost consideration in their monetary policy decisions is domestic demand and inflation trends. Kshitij Anand: Let us also get your viewpoint on what FPIs or FIIs are doing at this point in time. In fact, we are seeing FPIs continuing to sell Indian fixed income assets despite improved macro indicators. Could you shed some light on what's happening right now and how you are interpreting this trend? FPIs continued to sell Indian fixed income with more than US$2 bn of outflows in June. Puneet Pal: We have seen a decent amount of inflows in 2023 and 2024. In both these years, there have been significant inflows into fixed income from we talk about the last quarter, from April to June, we have seen some outflows. This could be a result of profit booking—taking some profits off the table—because we have witnessed decent returns from Indian fixed income assets over the past two instance, the 10-year benchmark yield has come down from a high of around 7.60% in 2022 to a low of around 6.25% just a fortnight ago. So, FPIs who have invested over the last two years have seen good returns on their portfolio could very well be a case of profit-taking, and also the fact that the US-India interest rate differential has narrowed, leading to some capital we believe it's more about profit booking rather than anything fundamentally concerning. As you rightly pointed out, our macro indicators continue to remain strong and stable. Going forward, we expect this stability to from a macroeconomic standpoint, India is in a sweet spot, and there's no reason for concern. It appears to be more of a tactical reallocation after a strong rally in Indian bonds over the last two years. Kshitij Anand: So, no red flags there for the Indian market? Puneet Pal: Yes. (Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Economic Times
11-06-2025
- Business
- Economic Times
Small and largecaps attractive, midcaps require caution: Aniruddha Naha
The capex cycle or the investment-oriented businesses, investment cycle oriented businesses do very well over a period of time Synopsis Aniruddha Naha of PGIM India AMC remains positive on Indian markets, particularly financials, citing strong macro fundamentals and reasonable valuations. He anticipates FII inflows to initially benefit largecaps, eventually spreading to mid and smallcaps. Naha favors financials (especially NBFCs), capital goods, and discretionary consumption, driven by rate cuts, liquidity, and improved consumption trends. "The macro fundamentals look to be very strong out here. And financials as you pointed out, I think so that is one space where there is reasonable amount of opportunity to build a good long-term portfolio and valuations are quite reasonable out there. So, remain positive on markets, remain positive on financials," says Aniruddha Naha, PGIM India AMC. ADVERTISEMENT Firstly, help us with your take on the markets because the last week has been quite an eventful week for the Indian markets. We finally managed to break out of the range and not just that it was the big RBI bazooka as well. I am sure you must also be liking the financial space, but what is your overall take on the markets right now? Aniruddha Naha: So, we have continued to remain positive. I mean, we turned positive somewhere in the month of February, March and our view is whether it is short-term, medium-term, long-term, we remain reasonably positive on markets. Because the smallcaps have seen a reasonable amount of rally of almost 20%, can there be a pullback? There can be. But over the period of time, I mean, into the next couple of years, three years, it is a good time to build portfolios. The macro fundamentals look to be very strong out here. And financials as you pointed out, I think so that is one space where there is reasonable amount of opportunity to build a good long-term portfolio and valuations are quite reasonable out there. So, remain positive on markets, remain positive on financials. Well, yes as far as the positive momentum is concerned for the market, we do see a lot of positive news coming in as far as the inflows are concerned, the FIIs have already bought $1.7 billion of inflow in the month of May and the DIIs have bought $7.9 billion. Also, looking at the SIP numbers that are sitting at all-time highs, there is still that positivity in the market. We have been very-very range bound. But from here on, when we move up like you said you are very bullish on financials, but given that the FII flows might return to India specifically after the rate cuts, do you see the largecap basket benefiting from that? Aniruddha Naha: See, our sense is FIIs as you mentioned is at about 16% ownership. This has very little downside and incrementally as fundamentals for India look comparatively far-far better than what we see in a lot of other markets, invariably you are going to see FII flows coming into India. Will it be towards only largecaps? Yes, largecaps have that liquidity space to accommodate more money, but whenever that happens even domestic investors get positive and that is where you will see the HNI families, the family offices, even retail coming back and that will fill into the midcap, smallcap, microcap. So, yes, the initial rally on the FII side could lead to a largecap rally out there, but we continue to believe that money will flow to places or segments of market where valuations are reasonable. And we see valuations especially in the small, microcap space and the largecap space to be reasonably good. It is only the midcap where we will have to wait and see how things play out given that valuations are a little steep out there. ADVERTISEMENT Help us with your sector preferences as well. Any sector you believe is at an inflection point because we just got done with the earning season as well so any sector which looks promising to you right now? Aniruddha Naha: So, a few sectors which get linked, one is the rate cuts and the liquidity that has come in will definitely see financials participating especially the NBFC segment and probably a quarter or two quarters down the line even the MFIs, their asset quality gets addressed and that will flow through. The second thing as you have got liquidity and your cost of capital goes capex cycle or the investment-oriented businesses, investment cycle oriented businesses do very well over a period of time. So, cap goods will be the second part and third part is consumption because consumption was subdued, but this time around the rains seem to have taken off reasonably well, you have got tax benefits come through on the consumption for taxpayers and the rate cycle seems to be on the lower side, so from that perspective, discretionary consumption would be the third area where we would be extremely positive about how things will play out. 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