Action against consumer credit necessary; But the rural economy will recover in the near future, says this market expert

Market expert Ajay Bagga expects the US Federal Reserve to cut interest rates by 25 basis points by December next year. At home, he believes that the RBI is a step ahead with its crackdown on consumer loans given the strained situation in the rural economy. He expects a huge increase in rural consumption with the start of the wedding season.

The Indian stock market has been subject to extreme volatility in the last few weeks with the Nifty hovering around the 19,400-19,800 zone. With the second quarter results in and much of the positive sentiment surrounding an extended Federal Reserve pause already established, attention now turns to the national survey results on December 3rd. The results of the state surveys could provide a direction until the big finale – the parliamentary elections in May.

However, market expert Ajay Bagga is of the opinion that the trend will remain bullish until February 2020 as we could see volatility ahead of the big political event. In an interview with Moneycontrol, he said that RBI’s move to crack down on unsecured loans is a step in the right direction that could avert a major crisis in the financial landscape. Here are the edited excerpts:

Do you expect the Federal Reserve to consider a turnaround soon, or do you think it is too premature to expect a rate cut, at least before June 2024?

Yes, I think it would be premature, but what the Fed futures market is showing is very clear. Markets are expecting a rate cut by June and nearly five 25 basis point rate cuts by December next year. This is what the Fed futures suggest. Overall, economic growth in the USA was a positive surprise – the third quarter was very strong, with an increase of four percent compared to the previous year. The Atlanta Fed’s GDP forecast for the fourth quarter is around 2 to 2.1 percent.

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Let’s see how US consumers fare with Black Friday sales over the next four or five weeks. That will determine a lot about the mood. But there is one thing we must be careful about. The US growth came against the backdrop of the US budget deficit almost doubling in US President Joe Biden’s three years in office. A budget deficit of nearly $2 trillion and no economic growth would have portended major problems.

The main reason interest rates in the United States have gone from zero to five percent and we haven’t experienced an economic recession is this budget deficit. The US budget deficit is over six percent, which is enormous for a developed market economy. The same goes for Europeans when you see that they are unable to grow despite large budget deficits and that points to fundamental problems. What the market is taking into account is that there could be a soft landing for the US economy if Democrats are constrained in their spending options and the budget deficit doesn’t rise any further from here. And against this background, you are expecting an interest rate cut in June in the USA. Accordingly, India’s interest rate cut will also be postponed. We can’t lower interest rates if the US keeps interest rates stable.

Therefore, I think instead of April, we would also consider an RBI move in June-July, not earlier. So when it comes to the interest rate cycle, I don’t see much more positive outlook for the markets. The positive sentiment of a longer break has settled in but the market should rise from here until February and then there will be some volatility in India due to the national elections.

What do you think about the crackdown on unsecured loans? The RBI has increased the risk weights for consumer loans. And the RBI has also asked banks and NBFCs to conduct stress tests. Would you say there could be a crisis lurking somewhere around the corner or do you think the RBI is just being cautious? And secondly, do you think the banking sector’s underperformance could continue?

The second question is easier to answer. Yes, I think it will take longer. Margins will shrink as financing costs rise. And in fact, the cost of funding of NBFCs will increase quite a bit. Because the RBI makes it clear that banks must distance themselves from very large risks when financing NBFCs. That is not the job of the banks. The role of banks should be to put money into the wider economy rather than financing other lenders. Now let’s move on to the first question: Let me share what I’ve collected. I spoke to about five fintech lenders. I was on the jury of one of India’s largest fintech awards and evaluated around 60 fintechs there. And then I had some intensive conversations with MFIs on the sidelines.

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Monsoon deficiency is already leading to higher NPAs on the MFI side…in some key agriculture-dependent states. That’s already evident. This will increase. The NBFCs with ticket size less than Rs 50,000 are seeing a rise in NPAs. I think the RBI is responding to a lot of these leading indicators where rural demand has been weak and rural incomes have been constrained by a monsoon that hasn’t been that big. The government’s efforts contribute to the welfare safety net, but creating rural income and servicing these unsecured loans will require much more spending to restart the economy.

So I think the RBI is spot on. It is comparable to what Dr. And most of the real estate problems arose in the NBFCs or other lenders, not in the banks’ balance sheets. The banks got off relatively lightly, despite being caught up in the corporate credit problem. So the RBI is ahead. Has the problem already started? I think so, because a lot of these loans are first cycle loans.

And then when the credit cycle matures, people will think in line with the credit bureaus: no one will want to mess up their credit and they will continue to provide services. However, additional lending occurred, based on many replacement loans and many model-based loans. The models then provide a breakdown if an economic shock occurs. And we are experiencing a bit of a shock to the rural economy.

There has been an upsurge in the two-wheeler group with names like Hero and Bajaj seeing quite a rise. After earnings season, do you think the next leadership position will come from the automobile sector, particularly the two-wheeler sector?

Cars, if you could own a company that only made SUVs that would have been the best. These are the ones who are doing very well thanks to good margins. Two-wheelers benefit now. One of them is festival demand. The festivals were largely postponed from the second to the third quarter of the financial year. Now that 33 lakh weddings are taking place, you will see a huge increase in consumption. It spans the entire consumer basket…from the gold companies to the gold loan companies. Since two-wheelers are a rural product, 60 to 70 percent of two-wheelers are in the semi-urban and rural segment.

We are finally seeing an upswing after two years of very moderate sales. We expect two-wheeler companies to do better. But most of it is already priced in. How much of the price action will you see from here? That is different. From an economic perspective, demand should pick up this quarter. Then we have to see if there is follow-up demand.

Normally, national elections will infuse 20,000 to 30,000 crores into the rural economy where most of the voters live. So there will be a large transfer of actual resources into the rural economy. This should help two-wheelers. So yes, you can buy, but prices looked better six months ago, that’s what I said back then. So maybe I could sell in early January because stock prices are perfect, even exports are picking up and most of the discounting has happened in the markets.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com recommends users to check with certified experts before making any investment decisions.

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