Inflation risk has top bond fund manager Vikram Chopra hoarding cash

By Ronojoy Mazumdar,

A top-performing debt money manager in India is hoarding cash, as he braces for inflationary pressures to drive a bond rout.

Cash positions now make up as much as 30% of assets under management in various funds, compared to 0% at the start of the year, according to Vikram Chopra at DSP Investment Managers Pvt.

The drive into cash comes as commodity prices head higher and companies reflect the impact in their results and outlook, Mumbai-based Chopra said in an interview. “The market will try to see whether this inflationary pressure will be passed on to the consumer, whether the consumer can absorb it, and if growth remains strong, there is a case to normalise rates,” he said.

Investors across the globe are bracing for a quicker rate-hike cycle as pressures show up in everything from energy costs to food and housing prices. Reserve Bank of India Governor Shaktikanta Das this week flagged concerns on the nation’s core inflation, as CPI jumps in the major economies of US, China and Japan to fuel shock waves across markets.

“Given the prospect of inflation heating up again and the recovery gathering momentum, we see a risk that the RBI raises rates a bit sooner than our current expectations for a reverse repo rate hike in April 2022 followed by a policy repo rate increase in February 2023," said Abhishek Gupta, senior India economist.

Also read: Inflation concerns to test RBI’s easy policy

Traders will get their next read on India’s inflation this Friday, with economists forecasting an acceleration in retail price from the previous month to 4.4% in October. That comes after retail CPI had eased in recent months to drop back within the RBI’s tolerance band of 2-6%.

“Yields will gradually head higher to compensate for inflation above 5%. It seems like at least 5-5.5% in the next six months, and hopefully, growth continues to improve substantially higher than what RBI is projecting,” Chopra said.

While a cut in fuel taxes this month could help ease pressures, higher prices for non-energy goods may offset the effect, according to Kaushik Das, chief India economist at Deutsche Bank AG.

Besides increasing cash holdings, Chopra is also investing more in the belly of the yield curve, while reducing exposure to shorter-term debt that could continue to selloff as the central bank withdraws stimulus. He manages about $600 million in assets, including the DSP Government Securities Fund which has beaten 96% of peers in the last three years, according to data compiled by Bloomberg.

The 2026-2029 bond offer favourable carry gains from a roll-down strategy, where investors hold onto notes for coupon payments and then sell them for capital gains when yields fall, said Chopra.