Short-Tenor India Credit Lures Fund Seeing End to RBI Rate Hikes

(Bloomberg) -- Investment in India’s short-tenor credit may boost returns from as early as next month, with rate-setters coming close to the end of their monetary tightening cycle, according to IDFC Asset Management Company Ltd.

“The very short end is looking attractive now,” as spreads have widened, said Suyash Choudhary, head of fixed income at IDFC, which has more than $14 billion in assets under management. “The returns will come in when yields start falling, with more signs of RBI stopping rate hikes coming in.”

The gap between one-year AAA rated credit and government bonds has more than doubled to about 90 basis points, from an average of about 35 basis points in May when the Reserve Bank of India started raising rates. After increasing the borrowing costs by a total of 225 basis points this fiscal year, the central bank is expected to deliver another quarter-point hike on Feb. 8, before it pauses. 

IDFC’s call echoes playbooks globally, where money managers are starting to position ahead of peak terminal rates and even potential pivots by central banks by buying sovereign and corporate debt. The RBI slowed the magnitude of its rate increases in December, while corporate debt is looking attractive as companies show little signs of distress.

Short-end corporate yields jumped as banks competed for liquidity to fund strong borrowings from companies, Choudhary said. Credit demand has accelerated to a decade high, rising 17.4% year-on-year as of Dec. 16.

“Credit spreads are starting from a very low level and have room to expand as supply increases and market demands more liquidity discounts,” Choudhary said.

--With assistance from .

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