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Informist, Wednesday, Apr. 30, 2025

 

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--IndiaFirst Life CIO:Border tension release valve for gilts after ylds fell
--CONTEXT:IndiaFirst Life Insurance CIO Poonam Tandon's remarks in interview
--IndiaFirst Life CIO: See 2 more rate cuts, terminal repo rate at 5.50%
--IndiaFirst Life CIO:See 10-yr gilt yield falling to 6.00% in coming months
--IndiaFirst Life CIO: May see long-term gilt yld spread over 10-yr compress
--IndiaFirst Life CIO: May switch bond-fwd rate agreements to bond forwards
--IndiaFirst Life CIO: See bond forwards picking up only by mid-May
--IndiaFirst Life CIO: Prefer banking, cement, large-cap stocks
--IndiaFirst Life CIO: See consumer discretionary stocks gaining on tax cuts
--IndiaFirst Life CIO: See non-par policies doing better in Oct-Mar

 

By Aaryan Khanna and Vidhushi RajPurohit

 

NEW DELHI/MUMBAI – After the unilateral downward movement in government bond yields over the past month, the volatility and subsequent rise following the escalation in tension between India and Pakistan has offered a tactical release valve for gilt yields, according to IndiaFirst Life Insurance Co. Ltd. Chief Investment Officer Poonam Tandon.

 

"We have seen... (the) market was just going one way," Tandon told Informist in an interview on Friday. "The Kashmir issue has kind of brought that correction. But that was anyway due." Since Mar. 25, the yield on the 10-year benchmark 6.79%, 2034 gilt has fallen over 30 basis points, briefly falling below 6.30% for the first time in three and a half years.

 

The 10-year benchmark has surged by 10 basis points since then to close at 6.40% on Monday following the rise in tensions between the two neighbouring countries. On Tuesday, yields fell again after the RBI announced further open market gilt buys in May.

 

India and Pakistan have downgraded diplomatic ties and have been trading charges after 26 people were killed in a terrorist attack on tourists in Jammu & Kashmir's Pahalgam last week. India blames Pakistan-backed terrorists for the attack.

 

Notwithstanding the rising tension, the investment manager believes that gilts remain a good strategic proposition with further interest rate cuts coming in the next six months.

 

Tandon, who oversees around INR 310 billion in assets, said the Reserve Bank of India's Monetary Policy Committee is likely to follow up the two repo rate cuts with another two 25-basis-point reductions in the coming months, pulling down the policy rate to 5.50%. Consequently, she sees the 10-year benchmark yield falling to 6.00% in the next few months.

 

The geopolitical uncertainty from the Kashmir issue and the uncertainty caused by the tariff policies of US President Donald Trump is unlikely to hinder rate cuts in India, Tandon said. "Trump is mostly on the external front and from a domestic side I do not see how it will really impact in a major way," she said. "To some extent also, the US Treasury yields and our yields are slightly decoupled (for the last three-four months)."

 

On long-term bonds, the bread and butter investments for life insurers, Tandon doesn't seem much underperformance in them despite rate cuts traditionally favouring short-term bonds. The CIO sees the yield spread of the 30- to 50-year bonds over the 10-year benchmark gilt at around 50 bps, barely higher than the 45 bps offered by the 40-year benchmark over the 10-year gilt Friday.

 

In fact, once the terminal repo rate is hit, she expects additional liquidity in the banking system to push traders to these ultra-long bonds in search for the higher yields and price gains. "Traders could also come in or maybe even the FPIs (foreign portfolio investors) if they want to make a bit of money, they may also come in. So it depends on who jumps in. It's not only the insurance companies, the investors, who will buy," she said, adding that the spread could go to as low as 35 bps. 

 

Tandon said bond forwards that are scheduled to be introduced Friday may nearly subsume the bond-forward rate agreement market, which is estimated at nearly INR 3.5 trillion. Life insurers and counterparties may work out a change to designate their bond forward-rate agreements contracts to bond forwards after Friday as these contracts are more convenient for both parties.

 

However, Tandon said fresh contracts designated as bond forwards are not expected to be drawn up on day one of the new norms being implemented, and expects the market to pick up in earnest only by mid-May. Bond forwards will allow physical settlement of bonds, eliminate counterparty risk should Clearing Corp. of India set up a platform for it, and certain trades would also count towards a counterparty bank's statutory liquidity ratio requirements, all advantageous for insurers, Tandon said.

 

A bond forward is an interest rate derivative contract in which one party agrees to buy a government bond from another party on a specified date for a specified price. The norms for forward contracts in government securities notified by the RBI in February, will come into effect from May 2.

 

BEYOND BONDS

With the fall in the domestic equity market over the last six months, IndiaFirst Life has turned defensive in its stock picks and retreated to the safety of the Nifty 50 index before the market downturn.

 

After hitting a lifetime high of 26277.35 points in late September, the benchmark index fell below 22000 points before recovering to around 24300 points currently. Having ridden out this period and with the stock market volatile in the face of foreign portfolio flows blowing hot and cold, Tandon prefers domestic-facing sectors. Around a third of the book she manages is linked to Unit Linked Insurance Plans, which also comprises equity investments.

 

"We can only ring-fence to that extent as volatility is going to be there," she said. Consumer staples are not "going anywhere", while consumer discretionary stocks like Eternal Ltd. may do better after the government's tax sops announced in the Budget build up into savings that are eventually spent in the next few months, she said. The government fully exempted tax on income up to INR 1.2 million in the Union Budget for 2025-26 (Apr-Mar).

 

For Tandon, the banking sector is expected to be a standout due to improving liquidity conditions and cost of mobilising deposits. Another sector that appears promising is cement, which has seen consolidation in the recent past. Companies may begin to hike prices and the stocks could therefore gain traction, she said.

 

As a longer-term investor, Tandon still prefers large-cap stocks, which have reverted to better valuations after the correction, with the Nifty 50 trading lower than its long-term price-to-earnings average. Mid-cap stocks still have some froth left, while some small-cap companies look more attractive in valuation terms, she said. The latter remain only a minor pick for IndiaFirst as they offer lesser liquidity. Hard assets including metals may also do well in the current cycle as supply chains get stretched due to the US tariffs.

 

"The dollar has depreciated...so then what will happen, people will start going into hard assets. Therefore, even metals, and commodities, is a good play," she said.

 

On the life insurance industry, Tandon said the constant regulatory changes have made assessing collections difficult, with the latest being the tweak in surrender norms accounting in October. IndiaFirst Life had a muted year in FY25, with total premium income flat at a time when the industry grew over 5%.

 

She expects traditional products such as non-participatory policies to do better in the second half of the financial year as fixed deposit rates come down amid repo rate cuts and equity markets are roiled by volatility from the external front. The sales of these guaranteed products also augur well for fixed income market, with a potential increase in the demand for bond forwards later in the year as these products pick up, she said.

 

In addition to the recent popularity of ULIPs in FY25, Tandon said a novel product termed 'TULIP' that ensures both the investment flexibility as well as term cover has taken off well.  End

 

Edited by Ashish Shirke

 

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