SHORT TERM SCHEMES
Kindly refer to our letter dated August 28’2003 recommending switch from G Sec Funds to Income/Short Term Funds. It was based on some parameters which still hold true. Immediately on the subsequent day, some RBI official was quoted as saying that the yields at the long end should not have fallen so much & the yield curve is till not steep enough. Based on these comments, 10 year corrected to 5.28% & today also it is around the same levels.
Further to our earlier observations, we need to add the following specifically for the month of September’2003:
- Advance tax outflows in the second half of the month.
- Half year end profit booking by corporates & institutions.
- Building up of cash for likely outflow of RIB money in the month of October’2003
- RBI has converted special securities of Rs.19000 crs into three dated securities; signaling a likely OMO.
- All these above has further widened the Corporate Bond yield spreads.
G Sec Funds will remain volatile & range bound between 5.25% to 5.30%. Fresh funds should be invested in Short Term Schemes, which will give better risk adjusted returns & give the investor an opportunity to shift to Income Schemes on correction happening due to any or all of the above factors playing in the market.
Following is the extract of the comments made by RBI official as reported on CRISIL Market Wire.
“Mumbai, Aug. 29 (CRISIL MarketWire) – The Reserve Bank of India is concerned that the gilt yield curve is not as steep as expected following its repo rate cut Monday. A senior RBI official said Friday that the curve should have been steeper reflecting the expected rise in gross domestic product, credit offtake, and fall in the interbank liquidity. * * * “There’s been a parallel shift in the yield curve,” a senior RBI official told CRISIL MarketWire. “Yields (at the long end) should not fall so much. Market has to take into account credit pick-up, growth,” the official said. According to the official, liquidity could also not remain surplus, as it is presently. He noted that redemption of Resurgent India Bonds in October could pressure liquidity. “We have taken a step on this side (shorter end of the curve). We could take steps on the other side,” the official said. Effective from Monday, the RBI pared its repo rate by 50 basis points to 4.5%. The RBI had said Saturday that the repo rate cut “will help in making the yield curve not as flat as is the case now.” On Friday, RBI Governor Bimal Jalan had said flatness in the yield curve was “an issue.” Prior to the cut in the repo rate, the spread between the repo rate and the 10-year yield was at a mere 55 basis points. Presently, it is at 75 basis points. The official pointed out that one of the steps that the RBI would take to make the curve steep would be increase supply of government paper at the long-end. He noted that conversion of 190 billion rupees of ad hoc Treasury bills into marketable government papers was aimed at building up armoury for open market operations. On Thursday, the RBI had converted 35 billion rupees of ad hoc T-bills into 4.83%, 2006 bond, 45 billion rupees of bills into 4.88%, 2008 bond, and a whopping 110 billion rupees of bills into long tenure 5.87%, 2022 bond. The official also said that there could be state government borrowings in the next few weeks. States had recently tapped the market for 80 billion rupees worth of bonds but that borrowing was for swapping their high-cost debt with the Centre, this is in addition to the regular borrowings by the state. The Reserve Bank of India is confident of a high GDP growth in 2003-04. In its 2002-03 (July-June) Annual Report released Wednesday, the RBI said the 6% GDP growth it had projected for 2003-04 in April may now be exceeded significantly when it reviews its monetary and credit policy for year in October. GDP growth for 2002-03 was 4.3%. A higher GDP growth is expected to boost credit offtake from banks and slow investments into gilts, apart from straining liquidity. The RBI annual report had projected a 15.5-16.0% growth in banks’ non-food credit in 2003-04. End (45.86 rupees–U.S. $1)
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