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00:00Manpreet Gill, Chief Investment Officer of the MENA region and Europe at Standard Chartered
00:05joins in with his view on it.
00:08Morning Manpreet, thanks for joining us.
00:10Manpreet, it's a moment of pride for lot of us sitting on the side where as India debuts
00:15on the JPM bond, Emerging Market Bond Index.
00:19First of many to come, I believe this would nudge the likes of Bloomberg and maybe even
00:23Barclays going ahead.
00:24But do you think this is well deserved and what does this mean in sense of flows coming
00:28in because while this will encourage passive flows, active flows should have been coming
00:33in any which ways because India is one of the best performing papers in the Emerging
00:37Market Pack.
00:38Good morning, certainly an exciting time for all of us, both as Indians and of course as
00:45investors.
00:46But you're right, I think there's a difference between active and passive flows.
00:51Active flows can opportunistically come in, that's always been the case, right?
00:54And I think that's more about the regime in terms of allowing foreign investors.
00:58But the passive flows are important because that's what allows a more significant amount
01:03of flows to come through on an ongoing basis.
01:05Obviously, that means that there's much more attention, there's much more capital inflows,
01:10potentially helps sort of impose more of a cap on bond deals than would otherwise be
01:14the case.
01:15So in terms of just bringing in a significant amount of capital flows, those passive flows
01:18are important.
01:20But as an opportunistic idea, absolutely, I mean, we've been excited about this since
01:24the end of last year, where we've highlighted as one of the potential trades because during
01:28this inclusion process, usually ahead of it is where you tend to see, you know, a lot
01:32of those flows take place.
01:34So we think we're already in the middle of what's an exciting period for a bond that
01:38looks absolutely, in our view, very interesting relative to emerging market peers.
01:43What are clients saying?
01:44If I had to ask you this very directly, are all your clients investing in Indian paper
01:52at this stage?
01:53What is the feeling outside this country?
01:57Are you pitching Indian debt as opposed to maybe Indonesian paper at this stage?
02:03Well, each of our clients in our business tends to be very different.
02:07But yes, when I think about it as a CIO house, yes, it's been one of our top ideas for opportunistic
02:12portfolios since December last year.
02:15So that is one of the active ideas we've had on.
02:18And I think our rationale is more purely investment driven, right?
02:22Because one is if you compare either from an absolute return perspective or relative
02:27to the rest of the emerging market local currency universe, that's really the benchmark here.
02:31The yield is interesting and the currency is stable.
02:34And what the flows do is create the possibility of, you know, some falling yields or modest
02:39amount of capital appreciation.
02:40So if you take through those three metrics, absolutely, it stands out as a potentially
02:44very interesting idea.
02:46So from that perspective, we have been actively pitching it since December, obviously as part
02:51of our universe of opportunistic ideas.
02:53I think the yield and the currency stability, those very much remain in place.
02:58I think the key question is now that we've got to the point of where index inclusion
03:02starts, whether, you know, there's more to come in terms of potential capital flow tailwinds
03:08or whether we've already experienced some of those.
03:10I think that's what we'll be focused on the second half of the year.
03:13But for now, it's an idea we very much have open and actively talking about.
03:16I'm glad you bring that up because I think the play really is the alpha generation through
03:20capital gains.
03:21Yields have already moved or moved down in the last couple of months on anticipation
03:26of this inclusion.
03:27We've seen about $10.5 billion come into the market as well.
03:32From now onwards, would you be adding incrementally or recommending incrementally Indian paper
03:39or would you be just sitting on the allocation and hoping that all this passive flow that's
03:43going to come in over the next 10 months will probably then take your yields down to six
03:47half if that by the by maybe FY25?
03:50Well, the way I look at it is that if the basis of adding exposure was index inflows,
03:58then that period is most probably behind us.
04:01That's the reason why in our view, at least we put on this idea in late December last
04:05year, you know, to date.
04:07And that's what we experienced in this inclusion, whether in bonds or equities, you know, historically.
04:12That doesn't mean we necessarily close the idea today, but what it means is the basis
04:15of any investment view would change to just, you know, analyzing it just like we'd analyze
04:19any of the local currency markets.
04:21So today, here on, it'd be much more about a view on bond yields and a much more about
04:25a view on the currency.
04:27And sitting here today, we just published a second half outlook.
04:30We've still sort of chosen to keep it on because we think independent of index inclusion, you
04:35know, the yield premium on offer relative to other emerging market peers relative to
04:40other sort of income assets and the fact that the rupee continues to be remarkably stable.
04:45Those two factors still argue for it being an interesting trade.
04:47So the basis might have changed.
04:49But for the moment, we're quite happy to leave it on and continue to, you know, invest on
04:54the basis, even if it's just the carry.
04:57Okay, Madhvij, just one quick question.
05:01Is there a question that comes in between India equity versus India debt now that there
05:04is this event that has happened versus equity markets which have done so well, but are expensive?
05:11Well, I think that almost different asset classes are almost analyzed differently.
05:16And I'd say there's room for both.
05:17So we've discussed the bond idea.
05:19Indian equity is something we've been excited about, obviously, for a long period of time.
05:22We've alternated between overweight and neutral over the last few years relative to Asia,
05:26Japan.
05:27But today, it's again, one of our one key overweight.
05:29It's the only overweight relative to the Asia, Japan equity universe.
05:34So there's undoubtedly, I mean, that's the big debate.
05:35I think there's less debate about economic growth, policy continuity, earnings growth,
05:40those factors are there.
05:41The reason we're still okay leaving it on is, yes, valuations are high, but we think
05:45they're justified by the ROE.
05:48And if you take that sort of framework of the world, it's Indian equities, it's US equities
05:52where you see high ROEs, high valuations, but justified by high ROEs.
05:55So something we still have to monitor, but at least relative to other options out there,
05:59we still think it justifies an overweight.
06:02Okay, well, we are also joined, and Manpreet, if you have the time, please stay on because
06:06we're also joined by the Director of Asia Pacific Sovereign Ratings of Fitch Ratings,
06:13Jeremy Zook.
06:14Jeremy, great having you.
06:15Thanks for joining in.
06:16What does, okay, great, and good to have you.
06:21What does an event of this magnitude, and I know this is now known since September when
06:26JPMorgan first announced there is money that has come in as well, but today's the D-Day.
06:31What does an event of this magnitude mean for a nation like India, wherein all commentary
06:39suggests that foreign investors were craving, but they were wanting certain events to happen
06:43like this bond inclusion?
06:44What does this mean?
06:45Yeah, well, thanks for having me, first of all.
06:49I think, you know, this is certainly a big day for India, and we view bond index inclusion
06:54as positive for India's story.
06:58If we look at, you know, what factors we're thinking about, certainly deepening of capital
07:02markets through bond index inclusion and greater foreign investor participation is a big benefit,
07:10we think.
07:11It helps to broaden the investor base.
07:14India at the moment is very reliant in terms of bond financing on the local market, and,
07:19you know, bringing in foreign investors to play a bigger role will help to broaden that
07:24investor base and, you know, lessen some of the risks around crowding out issues when
07:30it comes to government debt.
07:32You know, we think it will help also in terms of financing India's modest external current
07:38account deficit at the moment.
07:40It does help bring in some greater external flows that helps on that external financing
07:46side.
07:47I think, you know, over the medium term as well, generally we do see positive trends
07:52when it comes to bond index inclusion and government policies in terms of pursuing sort
08:01of a continued prudent fiscal and monetary policy framework.
08:06So we think, you know, all of those factors are quite positive.
08:09I guess in terms of the credit rating, though, when we think about those positives, those
08:13are relatively medium-term issues, and so the near-term upside to the credit rating
08:19itself are somewhat limited from this bond index inclusion.
08:24Jeremy, but would you agree as compared to our emerging market peers, Indian paper, and
08:32this is numbers that we've seen, has been the best-performing asset in the emerging
08:38market pack in the recent past.
08:40Our economy is relatively stronger than most others.
08:44Policy continuity is visible for everyone to see.
08:47Inflation seems to be contained, and we don't even seem to be too dependent on FPFOs, at
08:51least in the equity market arena.
08:53Do you now feel that India is in such a comfortable spot that none of the changes internationally
09:00could have a major impact on us?
09:02Well, I think in terms of these bond inflows, I mean, certainly what will drive that is
09:10a lot of the passive inflows, at least from here on out, and those, you know, we think
09:14will be beneficial.
09:16I mean, I think so far we have seen a decline in bond yields in recent months.
09:21That has been sort of a lot of the front-running of this bond index inclusion from active
09:27investors, and so that has brought down yields, and so perhaps in the near term, some of
09:33the further declines in yields is perhaps a bit more limited, but still we could see
09:39some modest improvements in financing costs for the government.
09:43I mean, certainly in terms of the domestic situation, policy continuity following the
09:50election, despite the somewhat smaller margin for the coalition government, is, I think,
09:57a positive for foreign investors.
10:00Beyond that, of course, you have India's very strong growth story, and so those domestic
10:04factors should play a supporting role in attracting some of those active flows, especially.
10:10Of course, there is, foreign investors do pay a lot of attention to global market volatility
10:15as well, so that certainly is a potential risk.
10:19Right.
10:20Manpreet, all the money that we've been talking about that's been finding its way into the
10:24Indian bond markets already has about 10 odd billion, there could be 40 more coming.
10:29What is the nature of this money?
10:30Is this going to be sticky money?
10:32Because up until now, what we've seen is money that comes in as arbitrage or hedging money,
10:36right?
10:37Do you feel like this is the very first time that significant long-term money is going
10:40to be coming into India and could be the start of much more to come?
10:44Well, yes, and I think the nature, it's a great question, right, because nature is different
10:49in two ways.
10:50I think one is exactly as you described, if it's index linked, it would tend to be stickier
10:54by nature, because as opposed to taking, you know, as a global manager, an off benchmark
11:00bet that's binary on or off, you're more likely to talk in terms of overweights and underweights.
11:05So scaling the flows, that's something which will happen as part of day-to-day market operations
11:10and views.
11:11But, you know, a negative view might be just less than usual, as opposed to zeroing out,
11:16for example.
11:17So larger, stickier, longer term capital.
11:20But the second is, I think, related to the previous conversation, the focus is likely
11:23to be slightly different, because, you know, we're used to obviously the equity conversation,
11:27which is more about growth.
11:29But on the bond side, the focus is much more likely to be on the yield available, the inflation
11:33outlook, you know, the fiscal balance and currency stability.
11:38So very different conversation, different type of investor.
11:41But all of these, you know, to my mind, are good conversation to have, they're all signals
11:45of maturing and deepening of the market.
11:47So yes, different type of investor, different type of conversation.
11:50And I think that's really the way I'd be looking at it from this point forward.
11:55Jeremy, Sameer asked this to you, but I'm just kind of maybe wording it differently.
12:01I just wanted to understand from you.
12:06Indians globally remitting money year after year, and that is one stable flow.
12:11Now the bond market flows coming because we know that from whatever I read, that Bloomberg
12:17and some of the others will also include at some point of time, the Indian bonds and their
12:22indices as well.
12:23So that end of the flow is stable.
12:25And if indeed growth stays stable, then it's a matter of time before FPI flows also trickle
12:31back despite the valuation.
12:32So that plus the RBI having the ammo even right now with the reserves that the Reserve
12:38Bank has, and the fact that the government has spoken about a glide path, which they
12:44might overshoot in the budget as it comes, right?
12:47So do you reckon that there needs to be a relook for the ratings that a country like
12:57this has?
12:58Why or why not?
13:01So we constantly monitor the ratings and the drivers of those ratings.
13:07So certainly we've seen some positive momentum when we look at some credit metrics in India,
13:12especially around GDP growth and external finances, public finances.
13:18We still see as a bit of a constraint, even though, as you mentioned, we have seen some
13:22significant improvements there as well.
13:25So I'll turn to each of those.
13:27And certainly on the growth side, strong GDP growth will continue to boost India's economy,
13:33the size of the economy as a share of the global economy continue to boost GDP per capita,
13:40which will be positive for the credit metrics over the medium term.
13:44External finances over the past decade, we've seen quite a transition away from India being
13:49in the fragile five to now being in a very strong external finance position, modest current
13:56account deficits, relatively stable inflows and the very large FX reserve buffers that
14:05the RBI holds.
14:06I think when we look at the public finance metrics, though, and we have to think about
14:10this relative to peers as well, because that is how we position our ratings to a large
14:15degree.
14:16If we look at India's fiscal deficit, while we have seen certainly a glide path down and
14:22the government is showing a very strong commitment to meeting its fiscal targets, deficits on
14:29a general government basis are still about 8 percent of GDP for this fiscal year.
14:35And that's compared to about 3 percent for peer medians.
14:40That is just over 80 percent of GDP compared to 55 percent for peer medians.
14:46And so a lot of those fiscal challenges still remain.
14:48Now, I think we are seeing progress on the fiscal front.
14:51We do expect that the government will achieve certainly the 5.1 percent that it set in February.
14:58And we think there may be a lower target set in the budget in July.
15:03And we do think that they will be able to achieve the 4.5 percent in FY 26.
15:09So these are certainly positives.
15:10And that's something that we're watching quite closely in terms of how we see the general
15:16government debt trajectory over the medium term and whether that can be put on a more
15:21steady downward trend.
15:23I mean, just one quick question, just moving away from India's inclusion on the JPM index
15:29and keeping the focus on budget, fiscal prudence, and of course, the fact that what we've heard
15:35is BJP's coalition allies have been asking for financial packages for their respective
15:41states.
15:42And that was almost a given.
15:43Are you concerned?
15:44Are you worried that this could have or take a drain on our fiscal?
15:48Well, I think we'll have to wait to see what comes out in the budget.
15:52I mean, our view is, especially this year with the larger than expected RBI dividend,
15:58that there is some scope for the government to use those funds to increase spending in
16:04certain areas while still maintaining the 5.1 percent deficit target or perhaps even
16:11lower in the July budget.
16:14Certainly, I think what we've seen over the past couple of years is that these fiscal
16:19targets do appear relatively a relatively high priority for the government.
16:24And we do anticipate that that will be sustained over the next couple of years.
16:29And certainly that 4.5 percent, especially because it now looks very achievable.
16:35We think that will be an important metric for the government.
16:38I suppose where we could see a bit more in the way of a challenge is in terms of the
16:42composition of spending, whether the government can sustain that higher level of capex spending
16:49while increasing social spending or spending in other areas and continuing on this downward
16:55glide slope.
16:58Thank you.
16:59Thank you, Manpreet.
17:00We would have loved to chat with both of you longer, but for now, we are completely out
17:03of time.
17:04Have a good day and I guess we will hopefully catch up with both of you later.