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Insurance companies and fund houses have begun reducing their average duration in long-term funds, in a scenario where hopes of further repo rate cuts have got postponed.
Duration, in number of years, is a measure of how sensitive the price of fixed-income instruments is to a change in interest rates.
Cutting of the duration began a couple of weeks earlier. ICICI Prudential Life Insurance has cut the average duration from eight years to six. "It was a tactical call," said Arun Srinivasan, senior vice-president.
The Reserve Bank of India (RBI) will have its first-quarter review of monetary policy next month. Earlier, the Street was expecting it to cut the repo rate (at which RBI lends to banks) at the review. Now, however, many economists believe this is unlikely.
Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance, said insurers were looking at shorter tenure bonds, owing to postponement of the rate cut cycle and fear of further rupee depreciation.
"The longer the bond tenure, the higher is the risk. If the rupee falls further, long-term bonds will be impacted, with yields rising," he added.
Fund houses are doing likewise. "We recently reduced our average duration in long-term funds from 5.5 years to four," said a fund manager.
In this calendar year so far, RBI has cut the repo rate by 75 basis points; it is currently 7.25 per cent.
Since the start of this financial year (April 1), the rupee has weakened against the dollar by 10 per cent. Many expect it to slide more, on concerns that the US Federal Reserve might soon begin pulling back its quantitative easing programme.
Insurance sector sources said while life insurers might look at a tenure of eight to 10 years on an average, general insurers were looking at shorter tenures, of about a year.
The Insurance Regulatory and Development Authority rules say life insurers cannot focus too much on short term durations as part of their asset/liability management.
"While a 30-year bond tenure is now generally stayed away from, reductions by 12-36 months are a strategy being adopted," said a senior investment official with a private life insurance company.
GOOD TIMES NOT IN SIGHT
* Duration, in number of years, is a measure of how sensitive the price of fixed-income instruments is to a change in rates
* Cutting of the duration began a couple of weeks earlier. ICICI Prudential Life Insurance has cut the average duration from eight years to six years
* The Street was expecting the Reserve Bank of India to cut the repo rate (at which RBI lends to banks) in the July review
* Many economists believe the repo rate cut is unlikely
* In this calendar year so far, RBI has cut the repo rate by 75 basis points; it is currently 7.25 per cent
