#4th IFIS 2022 – India Macro Outlook – A reality check by Prasanna Ananthasubramanian

The 4^th India Fixed Income Summit kicked off with a session on India Macro Outlook by Mr. Prasanna Ananthasubramanian of ICICI Securities – Primary Dealership.

True to the tradition of the CFA Society Conferences, the speaker was balanced in his views with CAD, Currency & inflation not rosy, while some of the high frequency “volume” indicators like PV sales, energy and transportation volumes looking optimistic along with state finances in a better shape.

With Indian economy remaining and expected to remain strong compared to most others, driven by a robust domestic demand this would lead to a higher CAD and hence foreign capital flows are crucial to maintain currency stability. In speakers perspective, CAD is one of the most crucial factor that needs investors attention next year as CAD is a big component of BOP as India does not have a very good control of policy here as its largely an external vulnerability. While the broader Equity markets outperformance driven by domestic flows and appears to be de-coupling, the economy has not and it is still inter-connected. He reminded us of the basics of external balance that needs foreign capital flows to support the current account deficit.

While RBI built a war chest of Forex reserves using the FPI flows during the pandemic and its aftermath and hence has a buffer against currency depreciation, a significant portion (~40%) of the accumulation between Mar 2020 and Sep 2021 has been utilised over the last 12 months and adjusting for import cover, we have a limited scope for intervention and pegged INR – USD to trade in the 82-85 zone and the reference 10 yr bond yields move to around 7.5%

One of the interesting element of India’s crisis response was the supply side support to manufacturing. Having skipped manufacturing during its shift from Agriculture to Services, India need a larger manufacturing base to resolve the Jobs crisis and in that context PLI is an interesting idea to figure out if that is the way to push manufacturing. Timing of this policy is interesting as many are contemplating moving to China +1. It is an opportunity that would benefit multiple economies, and India is also in the picture to gain. Any country with energy security will emerge a winner as it seeks to manufacture for the world as importing nations seek to derisk, an interesting point here considering we are import dependent!

Commenting on the high frequency macro data that appears to be strong, he suggested that there is a  nominal illusion due to higher prices. Some of them would reverse and there is a downside to GDP estimates for the next year!

In balance, AP (as he is known in the fixed income markets) closed his argument with a view that India’s macro situation is a bit fragile but a lot better than what it was in 2009-13.

One of the most interesting feature of the presentation was the long term time series data he shared that captured the relationship between various parameters over long cycles and explained how short term factors do matter even when one takes a structurally positive view on any Emerging economy and factors that may appear unconnected may impact in the short term.

The interaction that followed the presentation was more insightful, with the participants raising issues that ranged from US fed to India domestic manufacturing

To a question on fixed income market micro structure, he pointed out how fixed income market has seen a bigger structural shift from being bank cleared to a wider support from Insurance/ PF and NPS books. While Equity markets have experienced a tectonic shift from being dependent on FPI flows to now being supported by domestic retail investors and is appreciated by almost everyone, institutional or otherwise, the change in fixed income markets is less known to a generalist!

Considering where we are now one of the key issue that investors / market participants were grappling with was around US Fed action. Not the one to mince words, AP was unequivocal with his assessment that the market participants have underestimated the US Fed’s ability and willingness to hike interest rates in its fight to tame inflation.

And I sat there thinking if it means that the Fed put has expired or way out of the money!