MUTUAL FUNDS

RBI may introduce a repo rate cut in January 2013 and a similar cut in March 2013<
09-Jan-13   17:40 Hrs IST

Mr. Killol Pandya
Investors with short term perspective may do well to cautiously invest part of their funds towards the longer end of the yield curve. Investors with a medium to long term perspective are advised to move along the duration curve in a confident but calibrated manner. says Killol Pandya, Head - Fixed Income at Daiwa Asset Management (India).

We at Capital Market interacted with Killol Pandya to now the outlook on debt markets for the year 2013.

Excerpts:

1) Regarding debt funds, since there is still a fair amount of uncertainty with regards to the precise timing of the interest rate cuts as we head into 2013, how do you approach debt funds now? Is it better to put your money in some of these open ended funds or do you think you would still stick to some fixed maturity plans (FMP) or even fixed deposits?

We have held that the interest rate cycle has peaked for some time now and we also hold that interest rate softening is just around the corner. In the past two policy interactions, RBI has stated that if the inflation numbers seem to show a distinct downward trajectory, it shall look to cut rates in the Jan-Mar 2013 quarter. As of now, the inflation numbers have peaked off and shall show a downward trajectory hereon. In that context, it is likely that RBI shall go ahead with rate cuts in Q1CY13.

The domestic debt markets had been on a defensive mode since many quarters. The last two quarters however, have been good for the markets with market yields seeing a distinct drop. The softening in market yields has largely been on account of increased flows into the debt markets as well as market expectations relating to rate cuts.

It is time for investors to look beyond defensive strategies. The Indian bond markets have already seen a good appreciation and the appreciation is likely to continue in a phased manner in 2013. I recommend investors to add duration to their debt investments in a phased and confident manner. In that sense, it may be worthwhile for investors to look at products such as dynamic bond funds, debt oriented hybrid funds and gilt funds.

2) What levels do you foresee for the 10 year benchmark government securities during 2013?

As of now, RBI may introduce a repo rate cut in January 2013 and a similar cut in March 2013. I In order to infuse higher liquidity into our system, RBI may engage in Open Market Operations (OMO). If these steps pan out as expected, the benchmark 10 year is likely to move down steadily and settle in the 7.75% to 7.90% habitat; which is a significant distance from the 8.10% - 8.15% range it is in as of now.

3) What's your outlook on fixed income markets for 2013?

The calendar year 2013 promises to be a good one for the domestic bond markets. As of now, the markets are in a 'short Term negative - long term positive zone'. While our short term view is one of cautiousness as inflation and fiscal deficit leading to government borrowing may continue to weigh on market participation. Our long term view is one of bullishness though the budget of the next year should be watched closely for signals of fiscal deficit. For now, Investors with short term perspective may do well to cautiously invest part of their funds towards the longer end of the yield curve. Investors with a medium to long term perspective are advised to move along the duration curve in a confident but calibrated manner.

Disclaimer: The above views and opinions alone are not sufficient and should not be used for the development or implementation of an investment strategy. Information provided shall not be construed as investment advice to any party. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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