Investment Ideas | RBI: Where top fund managers are betting ahead of potential big rate hikes

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A hawkish pivot from India’s central bank is forcing fund managers to scramble to find safer bets while bracing for potentially the steepest rate hikes in Asia.

The dilemma facing Indian investors as they try to assess the impact of the rate hike cycle is no different from what their global peers face while trying to predict the fallout from the most recent tightening. aggressive Federal Reserve for decades. RBI could start raising rates as early as next month.

Yields have risen and stocks have pared gains since the Reserve Bank of India focused on inflation rather than growth in April and indirectly tightened policy by introducing a higher interest rate floor. Here’s how some of India’s top money managers stack up.

The government on corporate paper
Debt managers prefer government bonds to corporate papers as the steep compression in spreads makes sovereign securities a better bet, said Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management Company.

The yield spread between three-year government bonds and similar high-quality corporate bonds had turned negative in April, falling from around 87 basis points in August, according to Bloomberg data. The spread was 31 basis points on Monday.

Bloomberg

The lucrative spot on the steepening yield curve is the four-to-five-year segment, said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. Longer dated papers are avoided because the bond offer premium is not fully accounted for, he mentioned.

Add current assets
The hoarding of cash in these uncertain times will weigh on overall portfolio performance. Fund managers say they add short carry trades to boost overall returns without accumulating risk.

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According to Murthy Nagarajan, head of fixed income at Tata Asset Management Pvt. Carry is the difference between the bond’s yield and the cost of borrowing, with gains coming as yields decline based on the time remaining to maturity.

Buy growth stocks and banks
While consumer-focused stocks will do well for now, companies that could benefit from increased capital spending could do better, said Mrinal Singh, managing director and chief investment officer at InCred Asset Management.

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Given the inflationary environment, it is important to choose stocks that can pass on higher costs. Banks can also quickly pass on higher rates in a rising interest rate scenario, said Mihir Vora, chief investment officer at Max Life Insurance Co. He suggested holding shares of companies in commodity-related sectors. commodities as a hedge, as supply disruptions will take some time to resolve.

Float Rush
Fund managers add floating rate notes as they act as a hedge in a rising rate environment, with the coupon moving in line with market benchmarks. Issuers have completed 28 free float deals so far this year, the most since 2005, according to data compiled by Bloomberg.

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Floats are a good hedge in a tightening cycle, said Mahendra Jajoo, chief investment officer for fixed income at Mirae Asset Investment Managers Pvt., though he warned the selling momentum may not continue. because the instruments risk increasing costs for issuers if yields rise sharply. .

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