Interview| A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC – ‘FPIs to find India relatively more attractive versus other EMs in 2022'

Inflows by Foreign Portfolio Investors (FPIs) in India are expected to be higher amid higher visibility of economic and earnings growth that India provides, compared to other emerging markets (EMs), says A Balasubramanian, managing director and chief executive officer, Aditya Birla Sun Life AMC, in an interview with Manish M Suvarna and Ruchit Purohit. Edited excerpts:

Do you see RBI increasing repo rate or reverse repo rate, or a change in stance in this calendar year after normalisation of liquidity in last two policies? What is bond market’s view on RBI’s stance?

RBI has been at the forefront in policy response to pandemic and they have done a remarkable job in supporting economy through the pandemic. We are witnessing that the worst impact of pandemic on economy is behind, and steady improvement in growth. Hence RBI has started the normalisation process and is absorbing excess liquidity via Variable Reverse Repo Rate auctions. Going ahead, we expect the process of monetary policy normalisation to continue in a calibrated manner without impacting the market sentiment. In our assessment, one could witness two repo rate hikes of 25bp each in this calendar year and normalisation of LAF corridor back to 25bps.

Your take on the overall earnings growth and also on valuations of the markets — compared to the other markets?

We believe the uptick in GDP growth around 6.50% to 7% to come back this year. This, in fact, will be driven by certain segments in the economy viz. consumption, investment and exports growing better than normal. As a result of this, we see significant turnaround in corporate profitability and, therefore, keeping the overall momentum in the market alive. Having said that, overall valuation is in fact at a premium of 15% to its long-term average. India is also trading at a premium to rest of the global market, however, China factor on one side and continuous reforms in India are driving the premium valuation.

What is the strategy of mutual funds for IPOs given that some have tanked badly, will Aditya Birla MF look at launching an IPO Fund?

The year 2021 was the best year for the Indian IPO market as it enabled many companies to raise capital. Many IPOs generated significant gains for investors, including mutual funds, in the form of listing gains. Most of the new-age businesses such as e-commerce oriented start-up companies, that have got long-term potential, managed to raise funds in a big way that India and the regulator can take pride in for enabling. The growing risk appetite from domestic investors is a good sign for building healthy long-term capital market. Listing gain or loss can be a function of various factors, hence, one must look at an overall basis on how companies are doing from the point of view of business objective and action. We, as a fund house, do not have any plans for launching an IPO fund at this stage.

Considering the expected three rate hikes by the Fed in CY22, inflation on cards, and the third wave across the globe — how do you see the inflows of FPIs in debt and equity market in India in the near term?

US policy tightening can lead to a reversal in flows to EM in 2022. And with the dollar expected to strengthen till mid-2022, FPI flows to EMs may remain under pressure. In contrast to most EMs, India has got strong FPI flows in equity over the past three years. Given the higher visibility to economic and earnings growth that India provides, FPIs are likely to find India to be relatively more attractive versus other EMs. Hence, while FPI flows in equity to EMs are expected to be muted in 2022, India is likely to do relatively better in the EM pack.

Inflation is no longer being called transitory by other central banks, what are your views on that? And how you see inflation and growth in near term given the third wave of pandemic?

We need to differentiate between inflation in advanced economies, particularly the US and to some extent Europe, from India. Inflation in advanced economies was a result of a very large stimulus creating excess demand, which was not satisfied by pandemic constrained global supply chains. The result has been multi-decade high inflation. While there are linkages via import channel and especially due to high commodity prices, but inflation in India, has largely stayed within the RBI’s inflation target zone. Omicron wave will likely affect both inflation and growth to some degree, but the impact is expected to be for a couple of months and much milder than what we saw in earlier waves given that restrictions have been far less, and economy is adapting to living with the virus.

In January, crude oil prices have risen sharply, which could put pressure on inflation. Considering this, how you see movement of yield on government securities in near term or before monetary policy and budget? Yes, rising crude price can put pressure on inflation but the actual impact will depend on the final pass through of prices and the sustainability of the increase. Government had recently cut taxes on fuel prices, which had provided some cushion to the recent rise in prices. Yields on benchmark 10-year government securities have already increased by about 15bps since the beginning of the year in response to higher crude prices and US yields and also because of lower RBI support to government borrowing. While there are some upside risks to government bond yields, particularly from the upcoming FOMC meeting, we draw comfort from RBI’s commitment to see that bond yields do not go far away from the macro-fundamentals and, hence, we do not expect a sharp rise from current levels in the near term.