Where top fund managers are betting ahead of possible steep rate hikes

A hawkish pivot by the Indian central bank has money managers scurrying to find safer bets while bracing for potentially the steepest rate hikes in Asia.

The dilemma faced by Indian investors as they try to gauge the impact of the rate hike cycle isn’t different from what their global peers face while trying to predict the fallout from the most aggressive Federal Reserve tightening in decades. RBI may start raising rates as soon as next month.

Yields have risen, and stocks pared gains since the Reserve Bank of India shifted focus to inflation from growth in April and indirectly tightened policy by introducing a higher floor interest rate. Here is how some of India’s top fund managers are positioning.

Government Over Corporate Paper
Debt managers prefer government bonds over corporate papers, as the sharp spread compression 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 papers and similar top-rated company bonds had turned negative in April from around 87 basis points in August, according to Bloomberg data. The spread was at 31 basis points on Monday.


The lucrative spot on the steepening yield curve is the four-five year segment, said Suyash Choudhary, head of fixed-income at IDFC Asset Management Ltd. The longer-tenor papers are avoided as the bond supply premium is not fully factored in, he said.

Add Short Carry Assets
Hoarding cash in these uncertain times will weigh on the portfolio’s overall performance. Fund managers say they’re adding short carry trades to boost overall returns without piling on risks.

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Attractive carry and roll down benefits make top-rated corporate papers of less than three-year maturity a good bet, according to Murthy Nagarajan, head of fixed-income at Tata Asset Management Pvt. Carry is the difference between the yield on the bond and the cost of borrowing, with gains coming in when yields dip in line with time left to maturity.

Buy Growth and Bank Stocks
While consumption-focused stocks will do well for the time being, businesses that could benefit from an uptick in capital expenditure could do better, said Mrinal Singh, chief executive and chief investment officer at InCred Asset Management.

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Given the inflationary environment, picking stocks that can pass on higher costs is important. Banks can also pass on higher rates quickly 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-linked sectors as a hedge, given that supply disruptions will take some time to resolve.

Rush to Floaters
Money managers are adding floating-rate notes because they act as a hedge in a rising rate environment with the coupon moving in line with market benchmarks. Issuers have done 28 floater deals so far this year, the most ever since 2005, Bloomberg-compiled data show.

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Floaters 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 that the sales momentum may not continue because the instruments risk higher costs for issuers if yields increase sharply.


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