The Indian equity market has been extremely range bound over the last few weeks with the Nifty buffeted around the 19,400-19,800 zone. With the second quarter earnings out of the way, and much of the positivity around a prolonged pause by the US Federal Reserve already baked in, attention now turns to the outcome of the state polls on December 3. The state poll results could provide some direction until the big finale – the general elections in May.
However, market expert Ajay Bagga is of the opinion that the trend will remain bullish until February post which we could see volatility leading up to the major political event. In an interview to Moneycontrol, he says the RBI’s move to crack down on unsecured lending is a step in the right direction that could avert a larger crisis in the financial landscape. Here are the edited excerpts:
Do you expect the US Fed to consider an early pivot or do you think it's too premature to expect a rate cut, at least before June 2024?
Yeah, I think it would be too premature, but what the Fed futures market is showing is very clear. Markets are factoring in a rate cut by June and nearly five rate cuts of 25 basis points to have taken place by next December. That's what the Fed futures are pointing to. Overall, if you see the economic growth in the US has surprised on the upside - Q3 was very strong with four percent plus year-on-year growth. The Atlanta Fed GDP forecast is running at about 2 to 2.1 percent for Q4.
Let’s see how the US consumer holds up for the next four or five weeks amid Black Friday sales. That will determine a lot in terms of the sentiment. But we have to be cautious about one thing. US growth has come in the backdrop of the US fiscal deficit being nearly doubled in US President Joe Biden’s three years. So running a fiscal deficit of nearly $ 2 trillion and not getting economic growth, that would have pointed to a lot of trouble.
The big reason interest rates in the US went from zero to five percent and we didn't get an economic recession is this fiscal deficit spending. The US fiscal deficit is running at six percent plus and that's huge for a developed market economy. Same for the Europeans if you see, despite big fiscal deficits, they are not able to grow and that's pointing to underlying issues. What the market is factoring in is that as the Democrats get constrained in terms of how much they are able to spend and the fiscal deficit does not rise from here, you could see some soft landing in the US economy. And on the back of that, you're factoring in a June rate cut in the US. India's rate cut also gets postponed in consonance with this. We can't be cutting rates when the US is holding rates steady.
So, I think instead of April, we would look at a June-July move by the RBI as well, not earlier than that. So from the rate cycle side, I don't see much more positivity for the markets. The positivity of an extended pause has got baked in, but the market should go up from here through February and then some volatility in India will come in based on the national elections.
What are your thoughts on the clampdown in unsecured lending? RBI has increased risk weights on consumer loans. And RBI has also urged banks and NBFCs to conduct stress tests. Would you say that there could be a crisis lurking somewhere around the corner or do you think the RBI is just being cautionary? And secondly, do you think the underperformance by the bank sector could get prolonged?
The second question is easier to answer. Yes, I think it will get prolonged. Margins will compress, because the cost of funds are going up. And in fact, the NBFCs will see a pretty steep hike in cost of funds. Because RBI is very clear that banks must dissociate themselves from very major exposures in funding NBFCs. That's not banks’ job. The banks’ job should be putting money in the broader economy rather than funding other funders. Now coming to the first question, let me share what I have gathered, I have spoken to about five fintech lenders. I was on the jury for one of India's biggest fintech awards and evaluated about 60 fintechs there. And then on the sidelines, I had some deep discussions with MFIs.
The monsoon deficiency is now translating into higher NPAs on the MFI side already… in a few key agriculture dependent states. That is already showing up. That will increase. The NBFCs in the less than Rs 50,000 ticket size are seeing a spike in NPAs. I think RBI is acting on a lot of these lead indicators where rural demand has been soft, rural incomes have been constrained by a monsoon, which was not that great. The government's efforts are helping with the welfare safety net, but to create rural income and to service those unsecured loans, you need much more spending to come back in the economy.
So, I think RBI is spot on. It's like what Dr YV Reddy did in 2007, where he increased the risk weights on the real estate segment in 2007. And so, when 2008 came, RBI was ahead of the curve and he could actually cut rates by November. And most of the real estate issues came on the NBFCs or other lenders, not on the bank balance sheets. Banks escaped relatively unscathed in that, though they got caught up in the corporate loans issue. So RBI is ahead of the curve. Has the problem already started? I think yes, because a lot of this lending is first credit cycle lending.
And then as the credit cycle matures, people are thinking with the credit bureaus in line, nobody will want to spoil their credit record and they will continue servicing. But extra lending has happened based on a lot of surrogates and a lot of model-based lending. The models then see a breakdown in case there is any economic shock. And we are seeing a little bit of a shock in the rural economy.
There's been a resurgence in the two-wheeler pack with the likes of Hero and Bajaj seeing quite a bit of a runup. Post the earnings season, do you think the next leg of leadership would come from the auto pack, particularly the two-wheeler space?
Autos, if you could own a company which only makes SUVs, that would have been the best. Those are the ones that are doing very well on the back of good margins. Two-wheelers are benefiting now. One is the festival demand. The festivals got postponed to a large extent from Q2 to Q3 of the financial year. Now, with 33 lakh weddings happening, you will see a huge upsurge in consumption. It's across the consumption basket… right from the gold companies to the gold loan companies and two-wheelers being a rural product, 60-70 percent of two-wheelers are in the semi-urban and rural segment.
Finally, we are seeing an uptick after two years of very moderate sales. We are expecting two wheeler companies to do better. But most of it has already got priced in. So how much of the price action will you see from here? That's different. In an economic sense, demand should pick up this quarter. Then we have to see whether there is follow-through demand.
Normally, what happens is, national elections will inject anything from Rs 20,000 to 30,000 crores and largely into the rural economy where most of the voters reside. So there will be a huge transfer of actual funds going into the rural economy. That should help two-wheelers. So yes, you can buy, but the pricing was looking better six months earlier, that's what I was saying at that time. So maybe I could sell going into January because stocks are priced to perfection, even exports are picking up and most of the discounting has happened in the markets.
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