25th January 2012

WF : What is your take on RBI's action of cutting CRR and leaving rates unchanged?

Ritesh : As per their endevour to manage liquidity, RBI has cut CRR by 50 bps, thereby adding permanent liquidity to the extent of 32k cr in the system. This would give some respite to the cash starved system and hopefully anchor short term rates. As far as Repo rates are concerned, RBI has mentioned clearly that from the current levels, rates can only go down. However, the pace, timing, and magnitude of such action would depend upon host of factors including core inflation, fiscal consolidation, and depreciating currency. We believe RBI is waiting to see significant and continuous fall in inflation and also significant fiscal consolidation before it eases rates. We believe this is prudent and cautious approach towards medium term growth and inflation management.

WF : How do you see the short end of the curve playing out now?

Ritesh: Short end of the curve will purely be a function of liquidity in near term. As liquidity eases in the system, we are going to see a fall in short term yields. Having said this, we also believe that the system could go close to 1.25 lac cr negative by Feb - March, which will then put pressure on short term yields. Hence, short term rates are going to remain volatile going ahead.

WF : How do you see the long end of the curve playing out over the next 6 months?

Ritesh : Long end of the curve would be a function of rates, possible RBI actions, and fiscal management going ahead. Wherein 50 bps CRR cut has added liquidity in the system, it has also diminished chances of huge OMO buybacks by RBI. The wait for rate easing by RBI might take longer than expected as core inflation might take some time to come down. Also, RBI has mentioned that fiscal consolidation would also be a factor for rate actions in future. We believe that the broad range for 10 yr benchmark G-sec would be 8.25% to 8.60%. Lack of RBI OMO support, huge supply of SLR might add pressure on yields and we might see 10 yr inching up towards 8.40% to 8.60%. Having said this, if liquidity in the sytem goes to 1.25 lac cr negative, we might see RBI OMO buybacks and yields could trend towards lower end of the range. Any secular easing of yields might take longer than expected.

WF : Where are the best opportunities in the fixed income market now?

Ritesh : Shorter end of the curve (1-3 yrs) provides decent opportunities in Fixed Income at present. However, investment horizon plays a major role in such decsions. For a horizon of 6 months, one could look at short term funds and for investment horizon of above 1 year, once could look at income funds.

WF : How attractive is the corporate bonds market? Is there a case for spread compression?

Ritesh : Corporate Bonds look much more attractive that G-Secs at current juncture. Fiscal has remained under pressure and there have been huge slippages therein. It has resulted in huge supply of SLR. Whereas, with current interest rate cycle at a high, most corporates have delayed / scrapped their investment plans, thereby reducing their demand for money. Hence not much supply of corporate bonds has come to the market. Also, there is a case of spread compression by 20-30 bps from current levels as corporate balance sheets are in much better shape than sovereign.

WF : Gold has corrected substantially in the last quarter. Does this make it a strong buy or is caution warranted ?

Ritesh : It is important to look at the reasons for the correction in the last quarter. A key point to factor in is that the shift of allocation from Gold to US Dollar was primarily on account of Liquidity crunch fears and not 'economic recovery' driven demand. So, there is no change in the long term growth prospects for the price of Gold. The panic levels towards the uncertainty of Euro debt crisis got elevated to such levels during the end of last year that investors preferred holding cash rather than Gold The 'safe-haven' interest towards Gold has again started as we have seen Gold prices moving higher. Thus, Gold remains in bull market phase. However, it has moved from a trending market to a trading market. Germany selling its 6-month bonds at a negative yields provides some sense to the level of panic in European markets. Monetary easing measures may not cease in the year 2012 in developed and developing regions which would keep inflationary pressures embedded in the markets It is thus important that investors concentrate on the long term value creation while being cognizant of the near term event level risks.

WF : How are you positioning your IndiGo fund now?

Ritesh : Canara Robeco InDiGo Fund continues to be managed like a Debt (accrual) & Gold (alpha generation) combination strategy. Given the current high yields on the short-to-medium term periods, it provides a competitive accrual yield to the portfolio. The active allocation between 10-35% of the portfolio provides an apt investment avenue for investors in current market situation. We continue to actively track global actions/events and their subsequent impact on Gold prices before changing allocation on the Gold front.