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$115 bn fund manager ICICI Prudential bets on short-term Indian debt
India's economic growth is set to accelerate sharply, making the ultra short-end of the debt market the most attractive segment, according to one of the country's top money managers.
The recent slowdown was a 'mid-cycle correction', and the central bank's policy support has laid the groundwork for growth to return to its long-term trend, Manish Banthia, chief investment officer of fixed-income at ICICI Prudential Asset Management Co., said in an interview.
The outlook is prompting Banthia, whose firm manages about $115 billion in assets, to focus on securities with maturities of up to two years or less. This positions him in contrast to many of his peers, who remain bullish on longer-duration debt, anticipating a more gradual economic recovery.
'This disconnect implies increased risk of a sudden spike in yields at the three-year and longer points as the economy strengthens,' he said.
The preference for shorter-dated paper, already a favored play in India's debt market, has been reinforced by the central bank's surprise move last Friday: a bigger-than-expected rate cut and additional liquidity injections. However, the authority also unexpectedly shifted its stance to neutral, warning that it has 'very limited space' left for further easing.
Adding to the pressure, Indian bonds sold off on Wednesday on concerns that the central bank could soon begin to withdraw excess liquidity, which has led to the overnight rate falling 20 basis points below the policy rate.
Despite this development, a central bank policy reversal might still be six months to a year away, said Banthia. The Reserve Bank of India is unlikely to take measures to bring the overnight rate on par with the policy rate over the next three months, he said.
'The RBI has front-loaded certain policy measures and will now allow them to play out,' Banthia said. 'If the recovery unfolds as they anticipate, they may revisit the liquidity situation in the next calendar year.'
India's economy expanded faster than expected in the January-March period, but rising trade uncertainties are weighing on sentiment. Despite this, the central bank maintained its 6.5 per cent growth forecast for the fiscal year to March 2026, which falls short of the government's aspirations for 8 per cent growth.
Excerpts from the interview:
The 1- to 1.5-year bucket should remain stable until the RBI actually begins hiking rates, while everything beyond that could start moving higher as expectations of policy normalization arise, Banthia said.
For duration funds, he prefers the 30-year bond over the 10-year note, as the spread has widened to about 65–70 basis points. The fund is using the 30-year as a defensive bet.
The fund remains comfortable holding AA-rated paper, though spreads have compressed significantly from three to six months ago due to surplus liquidity.
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