Investors opt for short-term papers as rate cut hopes get postponed

Cut in duration began a few weeks back kickstarted by volatile rupee and global risks

Insurance companies and fund houses have been reducing their average duration in long-term funds in a scenario when hopes of further repo rate cuts got postponed as the rupee has been volatile against the dollar.

 

Duration is measured in number of years and it is a measure of the sensitivity of the price of fixed-income instruments to a change in interest rates.

 

Cutting down the duration has begun couple of weeks back due to volatility in the rupee amd global risks. ICICI Prudential Life Insurance has cut the average duration from 8 years to 6 years recently. “It was a tactical call,” said Arun Srinivasan, senior vice president, ICICI Prudential Life Insurance.

 

The street was earlier expecting a repo rate cut in July. However, now may economists are of the view that a rate cut is unlikely in July when the Reserve Bank of India (RBI) will have the first-quarter review of the monetary policy. Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance said that insurers are looking at a shorter tenure bonds owing to postponement of rate cut cycle and fears of further rupee depreciation. "Longer the tenure of the bond, higher is the risk. If rupee falls further, long term bonds will be impacted with yields rising," he added.

 

Not only the insurance companies, even fund houses have reduced their average duration. “We have recently reduced out average duration in long-term funds from 5.5 years to 4 years,” said a fund manager.

 

RBI has cut the repo rate by 75 basis points in 2013 and it currently stands at 7.25 per cent. According to experts there are risk in the global market due to which risks to the rupee remains. Since the start of this fiscal the rupee has already weakened by 10 per cent. There are expectations that it may weaken further on concerns that the US Fed may start pulling back quantitative easing soon.

 

Insurance industry sources said that while life insurers may look at a tenure of 8-10 years on an average, general insurers were looking at shorter tenures of about 1 year. This is because as per Insurance Regulatory and Development Authority rules, life insurers cannot focus too much on short term and very short term durations as part of their asset liability management.

 

“While 30 year bond tenure is now generally stayed away from, reductions by 12-36 months is a strategy being adopted," said a senior investment official with a private life insurance firm.