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JM Mutual on the fallout on Markets

JM Mutual - Interest rates to remain steady

Post attack on the US, the oil prices have shot up to a high of USD 31 per barrel on expectation that some Gulf country might be involved in the attack and a possible disruption in oil supply. However, the possibility has now been ruled out and the OPEC has also committed to keep oil prices in a reasonable band possibly by increasing supplies if the need be. Thus, we do not expect oil to be a major threat though in the short term it could have some impact on the rupee.

The fact that world economy is slowing down and the resultant poor demand for oil would also keep prices under check. World equity markets (including India) have been performing badly for quite sometime. We do not expect FIIs to sell aggressively at current low levels. However, future inflows may just slowdown if US markets drop substantially and the markets over there become very attractive. As such we do not expect threat of a major pull out by the FIIs.

The RBI has also maintained that barring unforeseen circumstances (in this case we read this as a possible US attack on any Gulf country) the stance of the RBI would continue towards stability, sufficient liquidity and a softening bias in interest rates.

The Central Banks world over have injected liquidity to stabilise the financial markets. We expect RBI to adopt a similar stance. The overall liquidity in the system is good, deposit growth has been good and there has been little sign of a possible credit pick up. We expect interest rates to be steady mainly on the back of current liquidity.

We have been cutting down on the maturity profile of our debt funds over the last 3 months. We are likely to maintain the average maturity of our corporate bond portfolio comprising 55% of our Income Fund) at around 2.25 years. On the Gilt exposure in our Income Fund (35-40%) we are concentrating in the 2008 to 2012 segment as we see greater value in this segment. The poor spreads (30 to 50) between overnight call rates and the 1 to 5 years gilt segment has made this segment vulnerable to a correction. As such we are avoiding this segment. We are currently holding around 5% cash position and are likely to maintain it.