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Floating rate bonds stand to gain in current market scenario: Manish Banthia, ICICI Pru AMC

In an exclusive interview with FE Online, Manish Banthia of ICICI Prudential AMC shares his views on which category of debt funds is more suitable for investors in the current market scenario.

Floating rate bonds stand to gain in current market scenario: Manish Banthia, ICICI Pru AMC
With the RBI hiking rates by 40 bps, we believe this is the start of the normalisation journey.

Floating rate bonds have a positive correlation with rising interest rates and, therefore, returns on these bonds are positively aligned to rising rate scenarios. Given the current market context, the optimal way to generate returns from fixed income is by investing in floating rate securities, says Manish Banthia, Senior Fund Manager, ICICI Prudential AMC.

In an exclusive interview with Sanjeev Sinha, Mr Banthia shares his views on why ICICI Prudential has increased its exposure to floating rate bonds in most of its schemes, and which category of debt funds is more suitable for investors in the current market scenario. Excerpts:

Given the challenging macro situation, do you see the RBI aggressively hiking rates?

India as an economy has crossed the recovery phase and has moved into an expansionary phase. This means RBI will have to make rates more neutral and normal as the rates were in line with the crisis policy stance. With the RBI hiking rates by 40 bps, we believe this is the start of the normalisation journey.

The debt market in India has been very volatile. Do you expect this trend to continue?

We expect volatility to be high on the shorter end of the curve given that the curve is very steep. However, the longer end of the curve will remain more defensive as the curve flattens out.

ICICI Prudential has increased exposure to floating rate bonds in most of its schemes. What is the reason?

Given the prevailing conditions, we are of the view that the optimal way to invest is through floating rate securities. This is because of their inherent nature to adjust to rising interest rates and coupons which accrue to investors keep rising as the benchmark or overall RBI rates move higher. Also, floating rate bonds have a positive correlation with rising interest rates and, therefore, returns on floating rate bonds are positively aligned to rising rate scenarios. Hence, we added floating rate bonds in many of our schemes.

For an investor looking to invest amidst the prevailing uncertainties, which category of debt funds would you recommend?

We would recommend investors to consider floating rate securities as it is linked to market benchmark rates. It could be either a three-month T-bill, a six-month T-bill, or the Mibor rate (overnight rate) and they offer a spread over and above that. As the Reserve Bank of India increases interest rates, the market benchmarks also move up. Here, along with a change in market benchmark, your coupon too changes at periodic intervals. For instance, government securities which are linked to six-month T-bill rates are issued in different maturities – five years, 10 years and 11 years. When the RBI increases interest rates, the three month and six-month T-bill rates move higher. So, every six months, your coupon is being reset higher. Hence, we believe floating rate is a category which stands to gain in the current market scenario.

What is your take on credit assets?

We are and have been positive on the credit cycle since 2020 due to the deleveraging cycle the economy has been through over the past couple of years. Having said that, however, spreads today are tighter than what they were two years back. So, there is a possibility that spreads will normalise post which credit assets will look very attractive.

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