Debt Outlook
March, 2010

Arvind Chari- Fund Manager (Debt)  

Market round up
As expected, the short term rates spiked up more than expected. CD rates, 3 months and above has gone up by almost 1% since the CRR hike. 1 year CD rates are now available at 6.5%. Some banks also increased their retail deposit rates in the 1-3 year segment. On the longer end, the 10 year treasury bond inched up by 30 bps in the month to trade at 7.9% on the back of high fiscal deficit in a scenario of low liquidity and increasing short term rates.

The fiscal deficit for FY 11 although budgeted at 5.5%, a figure lower than what the markets expected, would still mean high supply of bonds which is keeping the markets nervous and thus leading to higher rates.

Shorter tenor rates view
As liquidity tightens in March on account of outflows from the system due to payment of advance tax and due to higher credit outflow it would lead to an increase in short term interest rates. Banks would ‘window dress’ their balance sheets in March thus leading to higher demand for funds to meet its credit needs. This could lead to liquidity tightness more than what the market expects leading to a sharper rise in short term rates.

Longer tenor rates view
Although, the supply would be high keeping the interest rates tight, 10 year bonds above 8% would offer good value to invest. Insurance and pension funds would look to allocate more to longer tenor bonds as rates rise.

Investment recommendation
As short term rates are expected to rise, it would be prudent to remain invested in liquid funds – so as to benefit from the re-pricing and to avoid mark-to-market losses inherent in non-liquid funds. Some investments in 3-6 month Fixed deposits can be considered in last fortnight of March as banks offer higher rates in short term buckets during that period.

Otherwise, RBI is expected to increase interest rates by 50 bps in its April policy and thus expect short term rates to keep rising. One year FD’s would be attractive only above 7.5%. Over this year, due to the requirement of MTM on all debt instruments above 91 days, the NAV of non-liquid funds would be more volatile. Thus investors seeking safe, tax adjusted returns should stick to investing their short term surplus in liquid funds.

Disclaimer:

The views expressed herein are the personal views of the Fund Manager. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The Sponsor, The Investment Manager, The Trustee or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable.This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of  The Sponsor, The Investment Manager, The Trustee, their respective directors,employees, affiliates or representatives shall be liable for any direct,indirect, special, incidental, consequential, punitive or exemplary damages,including lost profits arising in any way from the information contained in this material.

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