High inflation, proximity to terminal repo rate, improving growth conditions and fiscal stress will move government bond yields higher in 2020
The risks to India’s outlook is expected to be mostly geopolitical in nature for the calendar year, said Maneesh Dangi, Chief Investment Officer-Fixed Income, Aditya Birla Sun Life Mutual Fund.
“The recent US-Iran tension is a key emerging risk that has the potential to majorly impact global and Indian macros. For financial markets, another big risk is the US elections,” said Dangi.
However, the fund house is positive on India’s growth revival, and expects a near term cyclical upturn that is likely to be aided by substantial policy easing, positive global growth tailwinds, and the potential easing of credit stress.
After the sharp depreciation of 2018, the rupee, which was range-bound through 2019, is expected to depreciate to 75 to a dollar in 2020.
“We believe the rupee will depreciate to 75 to a dollar. Our view on Balance of Payments (BOP) is that it will reach a surplus of close to $20-25 billion, and a Current Account Deficit (CAD) of 1.75 percent for 2020. However, higher oil prices would be the key risk to this estimate on BOP and CAD."
A balance of payments surplus means the country exports more than it imports.
In 2019, the Indian unit dropped by 5 paise to close at 71.36 against the US dollar on the last trading session of 2019 on December 31, leading to a total loss of 159 paise or 2.28 percent in the year amid trade war concerns, a rebound in crude oil prices and higher import bill.
Dangi also envisages a rally in commodities, notably crude oil prices that may impact India’s interest rates and currency.
“We expect higher crude prices in 2020, not only due to the recent US-Iran tension, but also production restraints by OPEC (Organization of the Petroleum Exporting Countries), and higher demand from India and China. That will be bad news for India for both interest rates and currency,” said Dangi .
On the positive side, he said that the US trade deal for industrial metals will help metal companies in India that have been struggling with low international prices and demand.
With both prices and local demand assisting metal companies to achieve better volumes and sales, the stress in the metal sector is expected to ease in 2020.
Dangi felt that high inflation, proximity to the terminal repo rates, improving growth conditions, and fiscal stress will move government bond yields higher in 2020.
Dangi said the credit stress for the financial system, which began in 2012, was discovered fully in 2015-18 and might have peaked in 2019.
According to Dangi, high non-performing loans were the chief reasons of slow credit growth in India.“But over the past five years, retail credit has expanded rapidly. Rising unemployment, and low wage growth, could create some stress in the retail lending books of financial institutions.”
“The chief risks in India are some special situation credits. Some large balance sheets continue to struggle and significant intervention may be needed by the RBI and the government to avoid major accidents there,” he added.Given that credit is somewhat of asymmetric bet, Aditya Birla Sun Life Mutual Fund will postpone the call to dial down on credit risk for a ‘few months’.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.