But warn in unison - Do not attempt to time your entry into a bond or gilt fund on expectation of a rate cut. Instead, focus on your investment horizon since the fund industry now offers funds in each maturity basket to cater to investors' different holding periods
16-Oct-2001 •Research Desk
Debt fund managers are divided on chances of a rate cut this week even as market participants aggressively bid up bond prices before the credit policy on October 22. The Rs 8,000 crore outflow on the back of Monday's twin auction has also failed to dampen the gains on Bond Street. While fund managers may not concur on the issue of reduction in interest rates, they all have an advice for investors – do not time your entry into a bond fund on hopes of a rate cut. If interest rates are not reduced, bond fund NAV might slip a bit. "Instead, investors must enter depending on their needs. They should invest in bond and gilt funds only if they have an investment horizon of over nine months,'' says Rajiv Anand, Head of Investments, Stanchart Mutual Fund.
A section of fund managers opine that a rate cut is round the corner to boost economy. However, expectations range from lowering of repo rate to a cut in CRR (cash reserve ratio) and bank rate. The hopefuls point that effectively there has been no rate cut this year as reductions were a mere roll-back of the 1% hike in July 2000. The fund managers also cite the sharp drop in industrial production coupled with low inflation to buttress their argument. Further, there are little resources at government's disposal to pump prime the economy, given falling revenue collections and spiraling fiscal deficit. "This strengthens the case for a rate cut," they say in unison.
On the other hand, some fund managers do not see the need of a rate cut at current juncture since markets are flush with liquidity and RBI is dexterously deploying other measures to maintain soft interest rates. This segment is also drawing comfort from finance minister's recent statement, who is reported to have said that interest rates are at a low and rate cut is not the only solution to economic recovery. Last but not the least; the external situation continues to be volatile and hence, RBI may not want to take any step that puts rupee under pressure.
Value Research spoke to a cross-section of bond fund managers to gauge their viewpoints on whether an interest rate cut is in the offing and its impact on bond markets.
The Hopefuls
Rajiv Anand, Head of Investments, Stanchart Mutual Fund: The markets are definitely expecting a rate cut and if we don't get one, then bond prices are going to go down. Despite the auction outflow, the markets are still very strong with a 75-85 paise jump in the (Tuesday) morning. There is no reason why the RBI should not cut interest rates, whether it is repo, CRR or bank rate. If a bank rate cut comes, we could see the yield on the 10-year benchmark (11.5%, 2011) go down to around 8.75 per cent levels. On the other hand, prices could take a dip and fall by as much as Re 1 if RBI does not reduce interest rates. Further, the actual announcement may be delayed if the rupee remains volatile.
Shailendra Jhingan, Birla Sun Life Mutual Fund: I do see a rate happening but more due to pressure from the government than fundamentals since it will be aimed at bailing out the government. Credit demand from companies is unlikely to surface till probably around last quarter. If bank rate is reduced from the current 7 per cent, then repo rate could also be cut as the RBI keeps bank rate between the corridor of repo and reverse repo rates. For instance, if bank rate is brought down to 6.5 per cent, repo rate will go down to 6 per cent. On the other hand, we could see a sharper reduction in reverse repo (curently, 8.5%) as RBI reduces the band from the current 200 basis points. In the event of a rate cut, the benchmark yield could touch 9 per cent but it is unlikely to go below that level. On the other hand, yields could rise to around 9.20-9.25% if there is no cut. However, a sharp fall is unlikely, given ample liquidity in the markets.
Nilesh Shah, CIO, Templeton Mutual Fund: A cut in bank rate is unlikely but we could see a 1% cut in repo rate to 5.5 per cent. Thus, bank rate will go in the backdrop as RBI uses to the corridor of repo and reverse repo to signal its intent to the markets. If a rate cut comes, we could see yield on the benchmark go down to 9 per cent. On the other hand, any untoward event like yesterday's volatility on the Indo-Pak border could delay a cut. However, a major sell-off is unlikely.
The Not So Hopefuls
Dhawal Dalal, Fund Manager, DSP Merrill Lynch: A rate cut may not happen at all since it is not needed at this juncture. A bank rate cut now will not help anyone except treasuries. Banks are anyway now only renewing credit lines to top rated companies and investing the bulk in government securities. Bank rate cannot go down in isolation but with other key administered rates like those on bank deposits and GoI Relief Bonds. While the market has already discounted a rate cut, we may not see a significant rise in yield curve if the reduction does not materialise.
Chandrashekhar Sathe, CEO, Kotak Mahindra Mutual Fund: A rate cut is not going to come since it is closely linked to the administered rates in the economy. The two will have to go hand-in-hand. The finance ministry ahs recently received a report from the Y V Reddy Committee, recommending lowering of interest rates on various government options like post-office schemes and GoI Relief Bonds. While the market expects a rate cut, I do not see a major sell off if the rate cut does not come due to ample liquidity in the market. Any firming up of yields will be immediately mopped up.
NandKumar Surti, Fund Manager, JM Mutual Fund: A rate cut seems to be unlikely. While external factors are not stable, the markets will not take anything less than 1 per cent. While the markets are going to run up till the credit policy, we may see some knee jerk reaction if bank rate is not cut. The liquidity continues to be strong and despite yesterday's big auction, yields did not move up. A CRR cut is also unlikely since the RBI has been infusing liquidity, whenever required, through reverse repos and in volatile times, through buybacks.
