- Overall outlook on macro-economic
- Expects inflation to hover around
7.00% in March 2011
- Expects RBI to hike repo rate by
100bps by December 2011
- Expects liquidity situation to
ease around April 2011
- Negative on funds following passive
management of duration and does not recommend investment in G-sec funds
6 months or so
- At present, the corporate bond curve is
largely inverted but
later in the year, expects the curve to realign to positive slope
- Has positioned IDFC Money Manager
Fund-Investment Plan around 1
year Certificate of Deposits (CDs) with a 6 month investment horizon.
maturity of the product will be reduced as the year progresses
- As the yield curve realigns to positive slope, the
over a period of 6 months, should benefit the investor
Overview of the Debt Market and
IDFC Fund House views that overall, we are in a bear market
interest rates. Inflation remains
the predominant concern of the RBI. Most of the policymakers and
India anticipated good monsoons to help cool down food inflation but,
contrary, the upward trend in food inflation has resulted in offsetting
beneficial effect of monsoon’s experienced.
The prices of vegetables and proteins are rising. Overall
in Asia, food
inflation is a cause of concern and in the next 3-4 months, there will
little relief from food inflation, if any.
Suyash Choudhary- Head Fixed
Income highlighted that the strength of private sector demand is
turning out to
be heavier than anticipated. Taking into consideration the last two
GDP, the numbers from private sector have surprised on the upside. He
pointed out that the global commodity prices are on a two year high
oil, metals and food prices. Given all these factors, it is difficult
to achieve its projected inflation target of 5.50% by March 2011. He
inflation to hover around 6.50-7.00% in March 2011 and the average
rate for the year 2011- 12 at around 7.00%.
Choudhary states that RBI
will hike repo rate by 100 bps by December 2011, taking the repo rate
from the present _6.5%____, raising rates from January 25, 2011.
fund house outlook on the macro economic background is quite negative.
liquidity situation in the
market is slightly better than previous month.
As against a deficit liquidity environment of INR 1,
50,000 crores in
December 2010, the current levels are down to around INR 70,000-75,000
as a result of spending by Government of India. Also, RBI through its
market operations is buying government securities. Going forward, in
2011, the liquidity may deteriorate further on the back of advance tax
but by April 2011, it should get better again
house is quite negative
on the G-sec curve as they believe that the G-sec curve was
down owing to the purchase of government securities by the central
November 2010, RBI has bought around INR 60,000 crores of government
and it is expected to buy further INR 10,000 crores. This demand was
suppressing the G-sec yields but now that the demand is over, G-sec
correcting to new highs.
forward, around declaration
of Union Budget i.e., till February 2011, the market will turn bearish.
mainly due to the fiscal deficit, which is expected to be higher at
of GDP next year, will result into heavy bond supply over
Mr. Suyash Choudhary is quite negative on funds that are duration
does not recommend investment in G-sec funds for next 6 months or so.
corporate bond curve is
largely inverted with one year CDs trading at 9.50-9.60%, three year at
and 5 year and 10 year are trading at around 9.00%. Mr. Choudhary adds
inversion is temporary and will not sustain beyond April 2011.
him, the primary reason for this inversion in corporate bond curve is
extreme liquidity deficit faced by the system. Also, the incremental
growth is around 25%; on the other hand, deposits are growing by only
causing interest rates to go up at such elevated levels. Starting April
given the high deposit rates, money will start flowing into time
the credit growth is also expected to slowdown. This would narrow down
divergence between credit and deposit rates. As a result, the slope of
yield curve will become positive again.
IDFC Money Manager Fund - Investment Plan
product proposition is buying
into 1 year CDs with a 6 months investment horizon. The fund has a 3
load of 0.50%. The idea is that as the yield curve realigns to positive
the investment strategy, over a period of 6 months, should benefit the
investors. The product is subjected to market risk and therefore,
yield movements. However, given the inverted yield curve and one year
trading at 9.50% level, this fund can be looked at as a powerful
Suyash Choudhary believes
that as long as the yield curve is inverted, a fund like Money Manager
Plan will perform better than Income Fund or Short Term Plan because
Income funds - Short term funds usually invest in 18months to 2 year
which are currently trading at inversion via the 1 year CDs. In the
scenario, thus, IDFC Money Manager Fund - Investment Plan Investment
Plan is a
strong product position.
With the bear market outlook and
anticipated rate hikes by RBI, the pressure on one year rates will
around September to October 2011.
Therefore, IDFC Money Manager Fund -
Investment Plan will start to reduce its average maturity on
during this year. So by
November to December 2011, the fund will start to reflect 3 - 4 months
average maturity profile. The overall investment strategy is to allow
to participate in this fund at the prevailing high levels of one year
over a period of 6-9 months, lessen the average maturity so as to
Mark-To-Market volatility of the portfolio.