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By Malini Bhupta

It’s time to pull back on the stimulus unleashed by the Reserve Bank of India at the start of the pandemic. In an interview with Malini Bhupta, UTI Asset Management Company’s Group President and Head of Fixed Income, Amandeep Singh Chopra, said that most of the benefits of monetary stimulus have played out and continuing with it could be riskier for the economy. Edited excerpts:

The central bank has done a lot to support the economy by keeping rates low and pumping in enough liquidity in the system. Do you believe that it is time to reverse the policy stance as spillover effects could lead to problems?
Growth is now well-entrenched and even the impact of the second wave on the economy is milder. A large part of the benefits which one saw from monetary stimulus played out during the worst phase of the pandemic in 2020 and first half of 2021. Continuing with it at the present stage could be riskier for the economy. One could argue that there could be another wave, but given the vaccination drive so far, the impact may be much milder on the economy. We have seen negative real interest rates when growth was affected, so interest rates were kept low. But we cannot run sustained negative real interest rates, particularly when growth is looking up. India will show one of the highest year-on-year growths into FY23. With so much liquidity and low rates along with a surge in demand, [it] can spill over into significant inflation concern. And this concern is taking centre-stage for the markets … There is a strong argument that the present policy has to reverse…

Do you expect RBI to change stance in December?
It seems there may be additional elements of normalisation in December. The central bank began reversing its easing cycle in the same sequence in reverse, as it gave the stimulus. They are already implementing strategies to reduce the liquidity in the banking system and gradually move the overnight rate up. There’s a possibility that RBI could start narrowing the policy corridor from the current 65 basis points in the next stage. I don’t expect a change of accommodative stance yet and maybe they may want to see two-three quarters of sustained growth.

Inflation is expected to be persistent. Do you feel that loose global monetary policy will result in risks and spillover effects?
We have seen unprecedented expansion of central bank balance sheets. It is not sustainable and risks do build up. The Fed has expanded its balance sheet more than what was done after the global financial crisis. Domestic liquidity is even higher than the post-demonetisation period. These are significant data points, and withdrawing excess liquidity is not easy without affecting asset prices and creating volatility. This risk is accentuated if you see a concerted global liquidity withdrawal by most central banks as they follow similar strategies; the cumulative impact will be large.

A lot has happened in the debt segment from the point of view of investors. How has it impacted investor sentiment?
We had good growth for 10 years when it came to debt funds. Every market goes through its own cycles. In 2018-19, there was an unprecedented credit down cycle, which impacted a certain segment of funds and led to change of investor preferences. Additionally, a fair amount of regulatory changes have taken place. Looking ahead, the industry is in a better position and if adequate diversification is followed by investors, the net impact of one product category not doing well is somewhat offset by others. I believe investors need to look at debt funds from a longer perspective and should be patient through such cycles; the returns from a 5-10 year holding period can be quite attractive.

Do you see corporates coming to debt markets?
Due to the pandemic-led economic slowdown, corporates focused on deleveraging and refinancing at lower rates. There has been a very conservative capital expansion behaviour by the corporate sector. Banks are flush with liquidity and they have been able to meet the reduced funding requirement of corporates at competitive rates. So the supply of bonds has been limited and easy liquidity saw compression in spreads. Going ahead, this could change when the corporate sector begins expansion and gets into a capex cycle. That could increase the supply of bonds, which we expect as economic growth sustains its momentum.

Do you expect the government to meet its fiscal deficit target or could it do better than the projection?
There was a concern on a possible slippage, but the government’s revenue mobilisation has been ahead of estimates, which gives the government leeway to definitely meet the 6.8% (BE) fiscal deficit number and maybe lower it. If the non-tax revenues meet the estimated target then the number could be even better. This could be positive news for bond markets on the fiscal side.