25th January 2012

WF : What do you read from the recent RBI policy announcement? What are implications on debt markets?

Pankaj : Today's monetary policy was a clear indication of RBI's discomfort in writing off the inflation concerns. Yet it also was a clear step confirming reversal of the previous policy stance. Going forward, we believe RBI would look into the economic data releases and government response on fiscal front before taking any further policy action. We believe the trajectory of core inflation (non-food manufacturing inflation) in coming months would decide whether RBI would cut Repo rate in the March policy. Further reduction of CRR is unlikely this financial.

The money market yield is likely to come down in coming month because of comparatively better liquidity conditions. The 10 year benchmark Government Security is likely to remain range bound with likely trading range being 8.15%-8.40% till next policy.

WF : What is your outlook on short term income funds? What are the key factors that will influence the shorter end of the curve and what is your prognosis?

Pankaj : Short term income funds tend to create a portfolio for investors that would generate regular income for the investors. The liquidity in the banking system plays very important role, along with the monetary policy stance of the central bank, while shaping up short end of the interest rate curve. We believe that it is this segment that provides a good opportunity for investors in the coming 2-3 months.

WF : How are you structuring your short term income fund now?

Pankaj : We believe in preservation of capital and generating stable returns for the investors. The current positioning of the fund is such that it would benefit as the liquidity improves in the system over next 2-3 months. By playing on the liquidity parameter, and supplementing the portfolio with high quality PSU bonds, we are placed to take advantage from the reversal of interest rate cycle.

WF : What is your outlook on corporate bond yields - is there a case for spread compression?

Pankaj : Interest rates have moved up unilaterally for the past 20 month, barring the last 2-3 months this cycle has turned. We believe that interest rate have hit the peak and likely to move downwards in the coming months. Though the movement has been swift, still there is good amount of money to be made. The corporate bond yields have fallen by much lesser compared to the Government securities. It is this bucket where we see one can make good returns because spreads are likely to come down over next 2 quarters.

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

Pankaj : The longer end of the curve is more active in the Government Securities' segment, with corporate bond market yet to be deep and liquid. The major parameters to watch out for would be how RBI changes stance in its Monetary Policy, the core inflation (non-food manufacturing) pans out, how inflationary expectations move and fiscal deficit numbers (both actual and budget projections for FY13). We believe that longer end Government Securities' yield are likely to be volatile till March, though in the long term they are likely to go down further.

WF : Where do you see the best opportunities in the fixed income space at this time?

Pankaj : The fixed income space, as an asset class, looks attractive at the moment, as interest rate cycle is coming down from its peak. For the investors there is a galore of options to invest depending on his horizon of investment and risk appetite.

WF : What are the key risks that advisors and investors should bear in mind now?

Pankaj : The key risk at the moment that investors should wary, is the interest rate risk. But what we have been emphasizing is the importance of liquidity, which according to us is highly under-rated risk by retail investors. The credit risk, we believe, is something which cannot be neglected, though we don't see the credit issues in near future.