With the RBI front-loading interest rate cuts, he sees room for one more cut by the end of the year and expects the spread between the 10- and 40-year government securities to shrink in the medium term . Growing interest of private sector participants in the NPS will enable fund managers like him to deploy funds at attractive valuations, he added.
Here are some edited excerpts from an interview.
What impact will the US’s crushing tariffs on India have on markets in the short to medium term? Can domestic institutional investors (DIIs) keep buying if there is a structural shift in trade dynamics?
The high tariffs are expected to have an impact on market sentiment, especially in export-oriented sectors such as electronics, textiles and pharma. We will have to wait and watch how this plays out over time.
Nevertheless, over the longer term, the markets will be more influenced by our domestic growth and a pick-up in consumption. Steady retail inflows will help DIIs to continue to deploy as and when valuations are attractive.
The RBI held rates steady and raised its inflation forecast for the first quarter of the next fiscal year. How will the markets react to these observations on inflation and the pause in light of global uncertainty? What do you estimate will be the terminal repo rate this year?
We believe the RBI is in a ‘wait & watch’ mode as the transmission of the earlier 100 bps of cuts of is still ongoing. The lower rates are expected to impact the economy from the second half of the fiscal year.
Having said that, we expect the lower inflation print over the coming months will give the monetary policy committee room for one more 25 bps cut before the end of the year.
We expect to see the terminal repo rate at 5.25% over the medium term. We expect an uptick in inflation from Q1FY27 and feel we should tone down expectations of further cuts. With the monetary policy announcement behind us, the market is expected to be more focused on tariff-related action for further cues.
Earnings growth has been tepid in this quarter. Do you think a recovery in government capex implies that earnings growth may have bottomed out in Q1FY26?
Companies have seen low earnings earnings growth, especially in the banking and IT sectors. While government capex has picked up meaningfully over the past few months, we expect a pick-up in earnings from the second half of FY26 on the back of festival-led consumption, improving rural demand due to a good monsoon, and a broad-based pick-up in credit growth. Tariff-related uncertainties should have also settled down by then.
Which sectors are you bullish on, and which ones will you avoid and why?
We continue to like the BFSI, auto, capital goods and healthcare sectors. Given the weak global economic outlook, we don’t see the IT and metals sectors offering any compelling investment opportunities for now.
Credit growth in the Indian economy is expected to pick up from the third quarter, which should see an uptick in earnings in interest-rate-sensitive sectors. Rural and urban consumption trends are expected to improve on the back of a good harvest and festival-related buying, which should bode well for discretionary consumption themes.
Are your investments in equities tilted towards large, small or mid caps and why, given that we will see lower nominal growth this year because of lower inflation?
The investment universe for equity schemes under the National Pension System (NPS) is the top 200 stocks by market capitalisation. This covers all the large cap stocks and a sizable number of mid cap stocks. While valuations in the mid cap space remain elevated, we take a bottom-up approach and have exposure to quality mid cap stocks which we feel have a strong earnings trajectory and a long runway for growth. Given the long-term nature of pension funds, we use any near-term volatility in markets to our advantage and ensure market-beating returns for our subscribers.
Do you expect private capex to pick up or remain slack, given that a pause in rate cuts is likely amid global uncertainty and inflation is set to rise in FY27?
It is true that except in a few pockets of the economy, private capex has been on the lower side of expectations. This is largely since corporates have been circumspect in issuing debt, with overall borrowings rising by only about 3% between FY21 and FY25.
While PLI (production-linked incentive) schemes have led to capital spending in niche areas such as electronics manufacturing, solar modules and electric vehicles, we are yet to see strong private capital commitments in the broader economy.
The slowdown of the global economy and the tariff uncertainty aren’t helping matters. While the domestic capacity utilisation has been improving, we need to see a strong recovery in urban and rural consumption before we can expect private capex to return in a big way.
Do you expect bond prices to rally, given the lower inflation print at least for this year?
We’re unlikely to see a strong rally in the bond prices, given that a bulk of the monetary-policy-induced rate cuts are behind us. However, we believe the steepness of the yield curve is on the higher side with the 10Y-40Y spread at about 75 bps. This is higher than the long-term average of around 40 bps. We expect this spread to get compressed a little over the medium term and reduce the steepness of the curve.
As a pension fund, is your allocation to equity capped and have you reached that cap? What’s the maximum allocation to debt and why?
Under NPS, there are two types of caps on equity. One is at the scheme level (composite schemes of central and state governments), where the fund manager can invest up to 25% of the portfolio in equity. The second type of cap is at the subscriber level in the ‘All Citizen’ scheme. Here the subscriber can set the allocation to equity, and the cap is 75%.
Composite schemes are managed by certain PFMs (pension fund managers) only, as decided by the regulator. We manage only the subscriber-choice schemes so there is no cap on equity for us, it is all subscriber-led.
With the ‘active choice’ option, subscribers get to decide their asset allocation to equity, government securities, corporate bonds and alternative asset schemes, subject to caps. The regulator also provides an ‘auto choice’ option, in which the asset allocation is based on their age and risk tolerance. Subscribers can modify their asset allocation up to four times in a fiscal year.
How is private participation picking up in NPS? Out of ₹15.4 trillion of assets as of June end, I believe 15% is from private employees and 85% from governent employees. Do you see room for more private growth, given that govt contribution is mandatory?
While overall assets in the NPS have been growing steadily, growth has been much stronger in the non-government segment. It was almost 50% in the previous fiscal year, compared to 18% for government funds, resulting in the share of private being closer to 20%.
This is largely due to growing awareness about the ability of NPS to help individuals build a substantial retirement corpus. With its low costs, flexibility and tax benefits, both during the investment and redemption phases, NPS stands out as a prudent choice for long-term household savings.
According to PFRDA, there are currently around two crore subscribers to NPS, excluding Atal Pension Yojana (APY) subscribers, which is quite low. We think there is a long runway for growth for this instrument in the years to come.
What was your fund’s AUM of your fund at the end of July? How did it grow over the past year and how did it perform vis-a-vis the competition?
At the end of July we had AUM of about ₹50,850 crore, an increase of 44% over last July. We continue to growth faster than the industry. NPS has been receiving a lot of attention as awareness about the retirement solutions is increasing.
According to data disclosed by the NPS trust on 6 August, we have delivered compound annual returns of 20.2% and 13.8% over the last five years and seven years, respectively. This places us among the top two funds among our peers.