SBI Life may tweak bond holdings after India rate hike

Jun 10, 2018

With Indian bond yields rising and the monetary policy outlook unclear, reducing portfolio duration makes sense, its chief investment officer says.

SBI Life may tweak bond holdings after India rate hike

State Bank of India Life Insurance looks set to reconfigure its bond investments after the Reserve Bank of India raised its interest rates this week for the first time in four years.

The insurance arm of India’s largest state-owned bank, a joint venture with BNP Paribas Cardif, had 77% of its Rs1,163 billion ($17 billion) in assets under management invested in debt at the end of March.

With rupee bond yields rising in response to the central bank's tightening on Tuesday, which wrong-footed some economists, it makes sense to lower the interest-rate sensitivity of SBI Life's portfolio, its chief investment officer told AsianInvestor.

“If yields breach 8% my strategy will be to reduce duration in the hope that next year will be a good year where yields will come down,” Gopikrishna Shenoy said in the aftermath of the rate hike.

On Friday, the benchmark 10-year Indian government bond yields briefly popped above the 8% mark before slipping back to 7.96%, having traded between 6.40% and 7.97% in the 12 months to June, according to Bloomberg data.

The current duration of SBI Life's biggest bond fund, the $1.9 billion SBI Life Bond Fund, is 4.17 years, which could be lowered to below 4 and compares with a duration of 5.11 years on the benchmark Crisil composite bond index, Shenoy said.

Although measured in years, duration is a metric that signals how much bond prices will likely fluctuate if interest rates are moved higher or lower. The higher a bond’s duration, the greater its sensitivity to interest rates changes, which in the case of India could drive market sentiment in the months ahead.

SBI Life manages more than 40 mutual funds.

RATE OUTLOOK

The Reserve Bank of India's decision to raise its policy repo rate by 25 basis points to 6.25% was in response to imported inflationary pressures driven by rising oil prices.

It was also accompanied by a "neutral" policy stance as the central bank kept markets guessing as to whether further hikes might follow.

The central bank has left room for the next monetary policy decision to be largely data-dependent, Lakshmi Iyer, chief investment officer for debt and head of products at local asset manager Kotak Mutual Fund, told AsianInvestor.

Iyer thinks there is more tightening to come, but only to a limited extent.

"We now seem to be in a shallow rate hike cycle and do see the possibility of one or two further rate hikes this year depending on the inflation trajectory as well the global bond yield environment," she said.

It is a modest outlook shared by Shenoy.

"As far as the fixed income outlook is concerned, we think we are the closer to the peak [in terms of bond yields]," he said.

Nevertheless, it could take time before bond yields start to cool off.

“With no great triggers for yields to ease, we could expect long bond yields to remain at elevated levels,” Iyer said in a market update after the RBI rate hike was announced.

TAKING ADVANTAGE OF VOLATILITY

Government securities accounted for 45% of State Bank of India Life Insurance's investment portfolio, corporate bonds accounted for 25% while other securities account for 7%, according to its annual results for the financial year 2017-2018.

Shenoy said he expects to maintain cash/liquid asset levels of between 5-10% to take advantage of expected market volatility.

Apart from inflationary pressures, India is also set to have a series of state elections this year as well as general elections that must be held before April/May 2019.

From that perspective, the RBI rate hike couldn't have come at a worse time for Prime Minister Narendra Modi. As such investors in the Indian bond market could remain on edge for some time to come.

And while investors will attempt to remain flexible in the face of market uncertainty, for large investors like SBI Life it can be trickier to make portfolio changes, Shenoy said.

“When news flows [that we are looking to buy or sell] into the market, the market moves, but if we cannot make portfolio changes even after the news is discounted, it becomes a challenge for us. A transaction might not always come at the price[ we want],” Shenoy said.