'Addressing rural distress should be theme for budget FY25'

Equity indices are at all-time highs. Debt inflows from FIIs have been robust given the JP Morgan inflows. How does it all look like to you ?

India has been reaping the benefits of healthy growth momentum, and stable and prudent macro-stability parameters led by clear and credible policy bias. In this backdrop, all India-linked assets have caught the fancy of both local and global investors. Thus, both asset classes are doing well.

US markets are discounting two rate cuts by Fed this year. Here the benchmark 10-year yield is down to 7%. What's your take on rate trajectory in India?

There are clear signs of a slowdown in the US economy. Restrictive Fed policy work is underplayed and at some time the Fed will have to take into consideration the risks of an “overkill". Robust India growth is giving space to RBI to be on hold despite cooling core inflation. Moreover, food inflation has also been high and sticky due to poor rainfall last year. However, IMD has forecast good monsoon this year which should cool food inflation. As Fed starts easing later this year and India inflation moderates, RBI is likely to ease policy rates here as well.

Inflation, especially food, is causing a hole in the common man's pocket. What's your estimation of food price inflation, given monsoons have been sub-par until now?

Over the last two years, the monsoon has been below par and global food prices have seen supply shocks, leading to higher food inflation. Going ahead, the monsoon this year is expected to be in “surplus", which, complemented with astute supply management by the government, will bring food inflation closer to RBI target (4%) in the second-half of the current fiscal (FY25). June accounts for a small part of overall rainfall and it’s the July rainfall which is most important for kharif output. Thankfully, rainfall has picked up now which should augur well for kharif output and food inflation.

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How do you expect the government to address the rural consumption issue in the upcoming budget? Any positives likely to spur urban demand?

Maybe, one clear message from the general election has been signs of distress in rural India. The current regime has been swift to respond, and we expect them to focus on the consumption side of the economy in this budget. Reducing direct taxes for the lower strata and schemes towards rural upliftment should be the themes for the upcoming budget.

Is capital gains tax likely to be rationalised across equity, debt, realty at the upcoming Budget? 

All capital market investors do take “risk" when they are exposed to the variety of market-linked instruments. Ideally, tax treatment for such exposure should be at par and not the driving factor for investment decision-making. Also, if India has to embark on strong private capex-led growth, private corporates will need to raise capital from all sources and cannot rely only on equity markets and banks. Debt capital markets have a very important role in this, and government and policymakers are fully aware of its importance.

Govt expenditure has risen and supported the economic engine. What's your view of private investment take-off?

“Ability" and “willingness" of private corporate and banking balance sheet are key to sustaining the private investment cycle. With election cycle uncertainty behind us, we see enabling conditions in place for the capex cycle to start, given the cleaner balance sheets and government policies to bolster demand.

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There is a jump in retail unsecured credit through shadow banks. How can one address this issue?

The RBI has already proactively raised risk weights on this asset class, and we have consequently seen a moderation in the growth. Asset quality is at one of the best points in the cycle and cyclically we would expect credit costs to normalise, going forward. However, NBFCs are currently very well positioned both in terms of lower leverage and high liquidity as well as provisioning and various buffers previously created to weather any increase in credit costs.

Borrowing by NBFCs accounts for half of bank loans. Does this worry you?

With the healthy growth momentum in the economy, we now have a twin balance sheet harvest for both, corporates as well as financial entities. While RBI has increased risk weights on bank lending to NBFCs, this is likely a prudential and proactive move. NBFCs over the past few years have benefited from the tailwinds in the economy, taking advantage of the abundant liquidity to improve asset liability matching, elongating maturities of debt, reducing interest costs, raising equity and deleveraging in the backdrop of improving asset quality and cycle level decadal lows in credit costs. While much of this will normalise going forward, the NBFCs are well placed to manage the same.

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