MUMBAI (Reuters) - One of India’s largest bond investors, Birla Sun Life Mutual Fund, has stacked up holdings of longer-dated paper in a bold, contrarian bet that central bank policy makers are wrong to expect an acceleration in inflation.
Valued at around 13 trillion rupee ($201.68 billion), Birla’s “dynamic debt” fund now holds 40 percent of its portfolio in government bonds maturing in 2045, up from 35.9 percent in February, according to its website.
The bias towards the long-end becomes even more pronounced as the second and third biggest holdings are in bonds maturing in 2044 and 2029, that account for 15 and 7 percent of its portfolio, respectively. Birla does not disclose how profitable its holdings have been.
Elsewhere, investors have moved the other way, selling long-term debt after the Reserve Bank of India (RBI) stunned investors in February by changing its stance to “neutral” from “accommodative” due to fears of inflation.
The RBI doubled down on its stance in April, even raising fears of interest rate hikes, after it warned that inflation could accelerate due to a combination of poor monsoon rains, planned hikes in wages for government employees, and the introduction of a national goods and services tax next month.
Birla believes those fears are overblown and is betting the RBI, which holds its next bi-monthly policy review on Wednesday, will eventually reverse its view as consumer price inflation has remained below a 4 percent target.
Inflation eased to 2.99 percent in April, while economic growth has expanded much more slowly than expected.
“Inflation has been undershooting RBI’s 4 percent target consistently,” Maneesh Dangi, co-chief investment officer at Birla Sun Life Asset Management Company, told Reuters.
“We continue to expect the RBI to cut rates going ahead. Sooner they do it the better.”
Expecting global oil prices to remain subdued and structural changes in the Indian economy to keep food supplies plentiful enough to defuse risks of a food price spike, Dangi expects inflation under 3 percent in April to September, below the RBI’s projection of 4.5 percent.
He also expects demand to stay weak due to tepid economic growth - a view he said was reinforced after data last week showed gross domestic product expanding a much slower-than-exected 6.1 percent in January-March.
“None of the upside risks to inflation that RBI pointed out has materialised,” he said. “So, where is this concern coming from?”
“Right now, all data is still supportive for our original thesis to play out.”
More analysts appear to be coming round to Dangi’s way of thinking. A Reuters poll last week showing the RBI will likely hold rates on Wednesday but soften its hawkish statements on inflation.
The benchmark 5-year overnight indexed swap has eased to 6.49 percent since the inflation data on May 12, down from 6.83 percent in early May, a move that traders say reflects that chances of an interest rate cut, rather than a rate hike, are increasing.
There is also more demand, albeit tentative, for longer-dated debt, with the yield on the most-liquid 6.79 percent 2029 bond recovering 19 bps since the inflation data.
But many traders believe it is premature to judge whether the RBI would be willing to cut rates after just recently changing its stance to “neutral,” and are reluctant to chase aggressive positions in debt markets.
“We don’t expect the RBI to change its stance so soon,” said
Anand Bagri, head of domestic markets at Ratnakar Bank Ltd.
($1 = 64.4600 Indian rupees)
Editing by Rafael Nam & Simon Cameron-Moore