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S N Rajan, CIO, Kotak Mahindra MF on His Investment Strategy

S.N Rajan, CIO, Kotak Mahindra MF - We are not making any major adjustments

We are not making any major adjustments to the portfolio. At best this would give an opportunity to add to larger names within tech by getting out of existing smaller ones. We may witness a longer period of rangebound markets with the recent events adding to existing uncertainty. Oil prices will solely depend on retaliatory action by the US. I don't think there will be any major shift of capital from the US as far as equity is concerned.

I think there is going to be no big hurry to invest in equity because no big move is expected in the near term. Markets may hold largely on account of reluctance by existing holders to sell rather than fresh infusions.

The AMC's Outlook
Event risk is always unpredictable. Very few events can alter the course of history. We therefore need to ask what WTC might mean for determining the future course in world politics and economics to fathom the impact on markets. That the event is sad and shocking and dastardly act of terrorism is beyond question. That it has hurt sentiments is obvious. But does it call for knee-jerk reactions? The answer is no.

We must see how it alters the fundamental situation for us. Clearly the economic factors we need to look at are the following.

1. External value of the Rupee
The US Dollar was already weakening in the preceding months. For the time being, the status of the Dollar as a safe haven currency is shaken after WTC. This might lead to some shift in allocation of world reserves.

Weakness in US Dollar reduces pressure on the Rupee as overall-Rupee overvaluation gets corrected. RBI has stepped into the market and apparently is supplying Dollars at Rs. 47.45. The forward premium is only slightly higher with no panic forward buying in sight. The condition in the forex market is orderly.

There is no immediate impact on Rupee liquidity expected.

2. Oil Prices
Oil prices predictably reacted and rose sharply in a knee-jerk global reaction. Since then, they have marginally retracted. With the US having substantial oil reserves, we do not think that this will have a lasting impact unless US retaliation involves Middle East or Afghanistan.

It is unlikely that such a conflagration will happen immediately. It will be some time before enough evidence is collected about the force behind the crime.

3. Interest rate outlook in US
If anything, the FED may be inclined to prepone another interest rate cut in light of the turmoil in the US markets.

4. Domestic liquidity
The liquidity in the system is very comfortable. In the absence of any immediate threat to the Rupee value (thanks to a mountain of forex reserve) we do not expect gilt prices to dramatically fall. The prices of Government securities have almost fully retraced losses of previous evening.

5. Equity Markets
Prices have reacted as all other markets and the nervousness on account of WTC event is abating. BSE Sensex is after initial sharp drop is recovering.

At this stage we do not see any need to alter the basic interest rate outlook and expect the market conditions to quickly settle down. Of course we will be closely watching developments for any signs of continued pressure on Rupee and oil-prices. RBI seems to be in total control of the situation helped by a more balanced reaction by market participants.