Our View
On policy dated 16th June 2011, RBI’s language seemed to suggest that the 50 bps hike in the last policy was a one-off and preference has returned for calibrated 25 bps steps. Also, if global growth prospects continue to deteriorate in line with the trend over recent months, then there is a reasonable likelihood of RBI going even more gradual (not hiking every 45 days). In any case, we expect a maximum of 2 hikes of 25 bps each before the RBI goes into extended pause.
Our Fund Manager had shared in his policy note that, “It is important to note that market rates are a function of quantum of future expected policy hikes and will not necessarily wait for RBI officially going into pause before turning down”. And he reiterated the view that given the falling credit to deposit ratios and expected future rate hikes by RBI, short end rates on the corporate bond curve are close to (if not already) at the top.
Liquidity situation is expected to improve going into July both owing to ‘structural’ factors (falling growth in currency with public and credit to deposit ratio) and ‘frictional’ factors (government unable to build cash with RBI owing to higher expenditure needs especially given the huge bond redemptions due in July). This will further prove beneficial to short end rates.
Our Fund IDFC SSIF-ST
IDFC SSIF-STP aims to benefit from the changing shape of the corporate yield curve. When the curve was inverted and the 1 year rates were the most attractive on the curve we had 70 – 100% of our portfolio in 1 year instruments. The curve has slightly steepened on the 1 over 3year, and the fund manager has started to switch up the yield curve by investing in 2-3 year corporate bonds with a mandate that final maturity of any instrument bought will not ordinarily exceed 3 years. The fund manager will endeavor to keep average maturity between 12 – 24 months. However, this may change depending on market conditions and evolving view.
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