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“So, as demand goes up, rates come down and all the other lending rates which are anchored to these rates will also come down. So, overall cost of capital in the economy will come down as a result of this,” says Vikas Goel, MD, PNB Gilts.
Why don’t you begin by just telling us your first thoughts on this inclusion that is likely to happen. What kind of implications do you see for the Indian bond markets and your own business?
Vikas Goel: Well, as I have said many times before, obviously it is good for Indian debt markets. It is good for this country. It is good for our company. Overall cost of capital will come down because the anchor rate, as you are aware, is the risk-free rate which is basically government bonds. So, as demand goes up, rates come down and all the other lending rates which are anchored to these rates will also come down. So, overall cost of capital in the economy will come down as a result of this.
This is just a start, I think. Obviously, other indices have followed one more and active flows also will come in. And this is also in addition to the inclusion two things which are incentivising flows is stable currency, stable dollar-rupee, and conservative fiscal policy. So, both make it very-very attractive for India as a destination for fixed income investors.
I want to understand how do you see the flows from the FIIs side to come into Indian debt market?
Vikas Goel: So, obviously, we are still underrepresented. So, compared to, say, a similar economy like Indonesia, etc., we will go from 2.5% to about 4% I think after the inclusion which is fairly-fairly insignificant even if we compare it to our equity markets where foreign investment is much-much higher as a proportion of total investment.
So, there is a long-long way to go. There is obviously a need not only for equity capital to come in, in terms of foreign savings to come into equity capital, but also into fixed income, we need long-term fixed income flows into the country, long-term savings at a fixed rate to finance infrastructure and so on, so forth and finance growth.
So, I do see that this is just a start. So, once a market is introduced to a wider audience, in this case passive funds, others who are not so to speak bound to invest will also start looking at India. And as I said, given our excellent macros, growth prospects, stable currency, very conservative fiscal policy, this is all very-very attractive to fixed income investors. So, overall, I do see cost of funds or cost of capital to come down in the longer run and the medium run in this country.
So, any impact on other global currencies or the rupee versus the dollar on the back of this, if at all?
Vikas Goel: Now more specifically talking about the inclusion itself, obviously it will start from tomorrow. So, do we expect roughly two-and-a-half to three billion dollars in one go tomorrow? No.
Some of it has already come in. Some will come tomorrow. Some will come later. So, I think a significant part will come in tomorrow to reduce the impact as much as possible because these funds track the index.
Since the inclusion is tomorrow, obviously, they would like to reduce the impact vis-a-vis the price at which inclusion happens in the index.
So, most of them will come or maybe a significant portion will come in tomorrow. Some guys who are slightly more active have already come in and others will follow in due course as they get their act together in the next week or so.
So, I see this two-and-a-half, three billion dollars spread across about a two-week horizon. Every month, it is not that on a day you will see two-and-a-half, three billion dollars, you will see spread across a period.
Now, in terms of impact on rates, you have already seen the market has outperformed, in the past after being very-very quiet, it has been performing well in the last month or so.
Will there be a big rally in bond prices? I do not suspect so because our monetary policy is still tight and the governor pointed out very clearly that the focus remains on containment of inflation, particularly headline inflation.
So, it looks like in the near future there would not be any change in monetary policy, either the stance or rate cut on the horizon. Therefore, any rally in bonds on account of this extra demand so to speak will be tempered.
I do not see a broad based rally, but I do see rates gradually coming down as month on month as these funds keep on coming in.
Obviously, each month we will see maybe not a single day but a week or so where the demand will be there, which will keep the yields in check. At the same time, I do not see them coming down in a secular fashion.
I understand you are going to start some of your forex dealings from July 1st as well. What kind of contribution do you expect from that because overall your revenue in the last quarter had shot up by 53% on a year-on-year basis to close to 480 crores on the top line, do you anticipate this kind of run rate to continue or even accelerate from here on?
Vikas Goel: So, as you are aware, our business is trading fixed income, so we are in trading business obviously, so to speak, giving a forward guidances in these uncertain times is fairly difficult. Having said that, as I said, in context of index inclusion, etc, that rates look like broadly coming down though very gradually which will be very helpful for our business.
As far as FX is concerned, I have said before, while it is good non-correlated business, but it will make a modest contribution. So, businesses other than interest rate trading, overall we do not expect more than 10%. We aspire to about 10% from fee-based DCM business, FX business, and other, we do a little bit of equity, so all of that combined we expect about 10%. But the good thing about this 10% is that it is non-correlated to our core interest rate trading business, so that is where we are at with FX.
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