8th February 2012

WF : While RBI has signalled a shift in stance, some analysts are still worried about the liquidity position on the one hand and the growing fiscal deficit on the other. What is your take on the fixed income markets over the next few months?

Shobhit : The outlook on fixed income markets continues to remain positive, as RBI is likely to cut rates and embark upon the rate reversal cycle over the next few months. Liquidity concerns are being addressed through continuation of OMOs (Open Market Operations) by RBI and the 50bps CRR cut announced in the last credit policy. The critical factor to watch is the process of fiscal consolidation, which will be unveiled in the forthcoming Union Budget in mid March 2012.

WF : The possibility of another round of QE by the US seems to be cheering equity and commodity markets. How significant is this development from the perspective of our domestic inflation and therefore the interest rate environment?

Shobhit : In so far as the next round of QE in the US or LTRO (long term Refinancing Operation) by ECB injects significant amount of liquidity in the global markets, it does put an upward pressure on commodity prices. Adverse exchange rate movement along with high commodity prices is a significant risk for both domestic growth and inflation. Since the balance of RBI policy stance has shifted to growth such developments would only delay the onset of rate reversal cycle.

WF : Where do you see the best opportunities in the fixed income space now?

Shobhit : The elevated yields on the short to medium term corporate bonds and also an inverted yield curve makes short to medium term bond funds an attractive opportunity for investors with minimum investment horizon of six months. Investors with investment horizon of one year and above can look at Income Funds or Gilt Funds.

WF : Is there a case for spread compression in corporate bonds?

Shobhit : Corporate bond spreads are at near long term fair values and there may not be much room for spread compression.

WF : M-T-M rules are set to get tighter for liquid funds, with all securities above 60 days now getting into the MTM bracket. What impact do you expect of this proposal on liquid funds?

Shobhit : The guidelines on any such change are still not available. However, the proposed changes are likely to lower returns and increase volatility.

WF : What are the key risks in the fixed income market that you will be watchful about?

Shobhit : The key risks to look out for in this year are the steps towards fiscal consolidation and inflation trajectory after March 2012. The forthcoming Union Budget in mid March 2012 therefore assumes significant importance for the markets.

DISCLAIMER: The views expressed Mr. Shobhit Mehrotra, Senior Fund Manager- Fixed Income and Head of Credit of HDFC Asset Management Company Limited (HDFC AMC), constitutes the author's views as on February 6, 2012 and is based upon information that is considered reliable, but does not represent that it is accurate or complete, and it should not be relied upon as such. The response to the questionnaire is for information purpose only and is not an offer to sell or a solicitation to buy any units of Schemes of HDFC Mutual Fund. The information / data herein alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on the authors views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The recipient alone shall be fully responsible / liable for any decision taken on the basis of this interview. The recipient(s) should before investing in the Scheme(s) make his/their own investigation and seek appropriate professional advice. Mutual Fund Investments are subject to Market Risks, Read the Scheme Information Document and Statement of Additional Information carefully before investing