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Fund Managers differ on interest rate outlook

The rate cut has pepped up the sentiment in the bond market but all now hinges on the timing of the next rate cut. When will the RBI oblige? Fund managers differ here and so do their investment strategies.

The CRR and bank rate cuts may have pepped up the spirits, but fund managers differ on the outlook going forward. The Reserve Bank, on Friday, cut the key CRR and bank rates by 50 basis points, each. A section of the fund industry believes that the current round of cut will be followed by a rate cut of identical magnitude at the start of the new fiscal. On the other hand, some fund managers opine that the central bank may not usher in another round of rate cut in the near future and this could lead to prices moving down. Accordingly, some fund managers plan to bring down the maturity profile of their portfolios.

"The question is - whether this is the beginning or the end. If the RBI or the government comes up with some encouraging statements or a cut on small savings rate, the sentiment will be bullish,'' says S Chandrashekhar, fund manager, ING Income Portfolio. "Another 50 basis point interest rate cut should come when the government starts its borrowing programme for 2002 in April. Hence, sentiment is expected to be bullish,'' points out Nilesh Shah at Templeton Mutual Fund.

While the market was expecting a cut of 100 basis points, the cut of 50 basis points came both as a disappointment and surprise for the markets. "The timing was peculiar though it stemmed the losses, suffered by bonds in the last two days as markets had started to become jittery. At the same time, the initial sharp rally was cut by profit booking and lower than expected cut,'' said a fund manager. Adds Rajiv Anand, fund manager, ANZ Grindlays Super Saver, "One should stay invested and downside is very limited from here.'' The fund, with an average maturity of 4.91 years, surely has a bullish outlook.

However, there are contrarians too amidst the current atmosphere of cautious optimism. "The one per cent cut is already discounted by the markets. Going forward, we will be cautious and move towards the short-end of the market,'' says Parijat Agarwal at Sun F&C Mutual Fund. Point out fund managers at Dundee, ''The RBI may not oblige the market with another rate cut in the immediate future. The 100 basis points cut last year had given jitters in the forex market."

Nonetheless, the current year has been buoyant for bond funds. For the one-month ended February 15, bond funds have posted an average return of 1.24%, which translates into an annualised return of 14.89%. On the other hand, government secuity funds, with their highly liquid holdings and long maturities, have posted an average gain of 1.91% (23% annualised).

With a divided market, the outlook is hazy. It remains to be seen whether bullish funds managers will rake in that extra buck with another rate cut or cautious income funds will safeguard your capital if markets turn jittery. The coming weeks could witness volatility as the markets debate on the size and timing (if it happens) of the next rate cut. With uncertainty looming large, investors would do well not to time their entry into bond funds. For, this could lead to losses from current high levels.