MUMBAI: A near-three-decade veteran fund manager in India is maxing out duration ahead of anticipated rate cuts, a sign of how a pivot among global central banks is encouraging investors to prepare for the coming era of cheaper money.
Anju Chhajer, a senior fixed-income fund manager with the US$64bil Nippon Life India Asset Management Ltd, is loading up on the longest papers her funds can buy, an attempt to ensure that those funds benefit from capital gains and avoid reinvestment risks when interest rates decline.
The focus on duration shows one way large portfolio managers are reacting to an anticipated pivot towards monetary easing and declining rates, which is spurring investors as far apart as New York, London and Mumbai to reconsider how they manage money.
India’s central bank was previously regarded as an outlier among global central banks due to its hawkish stance on inflation following a spike in food prices.
Governor Shaktikanta Das had ruled out a rate cut before headline inflation fell sustainably in line with the central bank’s 4% target, a level it went below in July.
But many investors are now betting the Reserve Bank of India (RBI) will cut rates before the end of the year.
“Our conviction is that the US Federal Reserve is going to cut in September,” said Chhajer. “The RBI may or may not cut in October, but by December they will follow.”
Other market participants expect a median of 25 basis points of cuts in the fourth quarter, according to a Bloomberg poll.
Chhajer suggested investors look at two key factors when weighing up the chance of a rate cut in India.
These are an increase in excess cash in the banking system, which would suggest the central bank is less worried about too much liquidity fuelling inflation, and a drop in the overnight rate to around 6.25%, which would be its lowest level for more than a year.
Chhajer manages the asset manager’s overnight, money market and low-duration funds, among others, and her funds typically invest in treasury bills, certificates of deposit, commercial paper and shorter-duration bonds.
Duration is a measure of the sensitivity of a bond to changes in rates and tends to increase as bond maturities get longer.
She said corporate bonds are one of the best opportunities for fixed-income investors in India, since the spreads they pay over government bonds will help cushion investors from lower rates.
“Government securities may deliver higher total returns near-term, but over a 12-month period, like-for-like duration corporate bonds are likely to do better,” she said.
Indian money market funds have seen a glut of a supply from banks this year as lenders increasingly turn to shorter-maturity borrowing to bridge a funding shortfall caused by robust loan growth and dwindling deposits.
The outstanding amount of certificates of deposit issued by banks rose to 4.6 trillion rupees in the fortnight through Aug 23, according to the latest data by the RBI.
That’s the highest since 2011. — Bloomberg
