ICICI Pru makes contrarian bets on short-term bonds as rate hikes continue

"There is no significant benefit to invest in longer-duration assets at this point of time as RBI is expected to remain in a long pause and is not expected to cut rates," CIO Manish Banthia said

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By Divya Patil and Subhadip Sircar

One of India’s biggest debt fund managers is taking a contrarian bet on short-duration bonds, arguing that the central bank won’t roll back its rate hikes anytime soon.

ICICI Prudential Asset Management Co. Ltd., with 2 trillion rupees ($24 billion) of debt under management as of February, is counting on the Reserve Bank of India to remain on an extended pause after it wraps up its hiking cycle soon. RBI has raised its benchmark rate by 250 basis points to 6.5% since May 2022.

“There is no significant benefit to invest in longer-duration assets at this point of time as RBI is expected to remain in a long pause and is not expected to cut rates,” Manish Banthia, deputy chief investment officer for debt at ICICI Prudential Asset, said in an interview. 

That contrasts with others such as Nomura Holdings Inc., which expects the monetary authority to cut rates by 50 basis points this year, with the first easing in the fourth quarter. Nomura isn’t alone: Goldman Sachs Group Inc. predicts that the RBI will reduce rates this year as well, prompting market players to add longer-duration bonds to their portfolios.

But, ICICI’s Banthia is known for his contrary approach. Last year, he was bullish on floating rate bonds at a time when most shunned them because of their lack of liquidity. Now he says that larger returns for investors “will come from accrual income and therefore one will have to concentrate on higher accrual as a strategy and not necessarily higher duration.”

That’s a reference to a strategy where the fund earns returns on the interest payments on the securities.

India’s yield curve is noticeably flat at the moment, signaling that investors aren’t seeing sufficient upside from the additional duration risk they would take by buying longer-term bonds. Moreover, shorter-tenor notes benefit from both accrual and interest-rate play in the debt market. They also insulate investors from extra risk and volatility.

Reserve Bank of India May Surprise Markets With a Pause in April

The average rate on top-notch company notes due in three years are at 7.80%, yielding one basis point more than their 10-year counterparts, according to data compiled by Bloomberg. 

Banthia weighed in on other key issues in his interview:
 

• He said he finds credit as an asset class very attractive, with leverage ratios of companies still low. “The credit cycle is positive, and we can get a higher carry by taking additional credit risk,” he said, adding that he likes the real estate sector for its improved fundamentals
   
• The corporate bond curve now is adequately priced, he said. The recent spike in the short end of the curve has created decent spreads on AAA-rated assets
   
• Banthia expects a demand-supply mismatch for government bonds this financial year, which may pressure longer-bond yields higher
   
• He thinks the RBI may hike another 25 basis points at most. The monetary policy is at a point of neutrality, he said, adding that he sees this as a period of time when the economy is able to achieve its potential growth