Mr. Santosh Das Kamath
Managing Director & Chief Investment Officer – Fixed Income India
Franklin Templeton Asset Management (I) Pvt. Ltd
Mr. Santosh Kamath is Managing Director and Chief Investment Officer at Franklin Templeton, Fixed Income in India. Mr. Kamath oversees the fixed income functions of the locally managed and distributed debt products and is currently responsible for managing 6.5 Billion USD of Fixed Income funds. Mr. Kamath joined Franklin Templeton Investments in 2006 and has over 20 years of investment and research experience in the Indian asset management industry.
Mr. Kamath earned his M.B.A. from XLRI, Jamshedpur in the year 1993 and his Bachelor of Engineering degree in electronics and telecom from REC, Bhopal.
He has won awards including best fund manager from various agencies; also he has been awarded as the Most Astute Investor Award for Local Currency Bond Research, INR Bond Markets by The Asset magazine for five years in a row
Q. What is your assessment of the debt market scenario? How has the government's tax cuts impacted the fiscal numbers? Is there any impact on debt markets?
Answer: Recently, Moody’s Ratings changed the outlook on India Government’s ratings to ‘negative’ from ‘stable’ citing a litany of problems from a worsening shadow banking crunch and a sustained slowdown in the economy to rising public debt. Fitch Ratings had also lowered India's FY20 Gross Domestic Product (GDP) growth forecast from 6.6% to 5.5%. because of large credit, squeeze originating from nonbanking financial companies. Credit growth has dropped to its lowest level in nearly two years due to slowing domestic consumption demand. In a bid to boost economic growth, the government announced a cut in the corporate tax rate along with several other measures. There expected revenue losses due to corporate tax reduction. However, the government has maintained the fiscal deficit number of 3.3% of the gross domestic product (GDP). The market expects that there may be additional borrowing or fiscal slippage. The economic slowdown, lower investment activity and headwinds from the global market are the main downside risks to economic growth. The inflation forecast is benign and growth projection revised sharply downwards, we expect value at the short to medium end of the yield curve.
Q. Can you please throw some light on the key measures taken by the SEBI to make debt funds manage risks better?
Answer: Recently SEBI, it has laid down detailed guidelines on valuation of money market and debt securities. These guidelines intend to make debt funds more transparent and bring uniformity across fund houses on valuation of debt securities. SEBI has brought about standardisation to ensure that if a credit event happens, all affected funds would value their securities in a similar way. It has imposed a waterfall approach to get the true value of the debt securities. Fund houses have to mandatorily rely on valuation agencies (such as CRISIL, ICRA) to arrive at the prices of traded as well as non-traded securities. This is applicable for all inter-scheme transfers as well. SEBI has also mandated all fund houses to report any change in investment terms of any of the debt securities to respective valuation agencies for valuation.
In liquid funds as well, the regulator has directed the fund house to invest 20% of assets in safer instruments like cash, T-bills and government securities. It also prohibits investment in debt securities with structured obligations or credit enhancements. There is graded exit load on liquid funds, up to one week. The Sectoral exposure limits have been further tightened from 25% previously to 20% which is sought to reduce the concentration risk of the portfolio and ensure better sectoral diversification. This will improve the liquidity & safety of these funds even more and raise their ability to handle redemption pressure.
Q. The interest rates cuts have been pretty consistent in last few years. Are we any where near the end of the rate cut cycle in India or can be expect more cuts?
Answer: The RBI in its October 4, 2019 policy reduced the repo rate by 25bps from 5.40% to 5.15%. This was the fifth consecutive rate cut and largely in line with the market expectations. RBI maintained its accommodative stance while reducing GDP growth forecast from 6.9% to 6.1% for FY20. The government has maintained the fiscal deficit number despite various reforms. The growth outlook was significantly lower than expected. In this backdrop we expect RBI to reduce rate by 15-25bps in FY20.
Q. What is your assessment of the NBFC space today? How long will it take for the issues to be resolved? How are you playing in this space?
Answer: Some of the retail NBFCs struggled with liquidity and economic slowdown as the credit growth is not picking up. These NBFCs have to compulsorily rely on bank loans and selling of securitised debt to raise money. However, during past 15 months or so, RBI and government made host of provisions including easing of liquidity, credit guarantee of the securitised portfolio, ‘on lending’ scheme, co-lending guidelines, easing regulations for external borrowings, etc. to address the liquidity conditions in the sector. The market drew comfort from these measures.
We believe that there are good players in the market that are better placed with well-diversified funding, strong promoter groups, and corporate governance practices.
Q. It is not easy for investors to understand so many types of debt funds. If you were an investor, which key fund types/categories would you focus on?
Answer: RBI remained sanguine about fiscal deficit target despite the corporate tax cut, lower tax collections and other announcements made by the government. The larger portion of the supply of government securities for H2 is in the 10-year and above segment. The data indicate a slowdown in the economy. The government has taken measures to boost the economy. These measures ideally would have some implications on fiscal deficit. However, the government has maintained the fiscal deficit number. The market expects that there may be additional borrowing or fiscal slippage. Investors may invest in funds with shorter to medium maturity.
Q. What be your message to a retail investor? Where should he be investing if he is looking to earn safe but better returns than bank FDs over 3 years and above?
Answer: First, retail investors should understand their financial goals while making any investment decisions. Secondly, investors should be very clear about the investment horizon, the amount of risk they are willing to take and the asset allocation that they seek based on risk. Investors can seek help from financial advisors while deciding on some of these factors.
From an investment perspective, investors who can withstand volatility can consider duration bonds/gilt funds. Short-term maturity instruments look attractive from a valuation perspective. We continue to remain positive on corporate bond funds and accrual strategies. Investors who are looking for accrual income opportunities may consider select corporate bond funds that offer higher yields.