SHIFT TO INCOME FUNDS ONLY ON FURTHER CORRECTIONS
TREAD CAUTIOUSLY & SHIFT TO INCOME FUNDS ONLY ON FURTHER CORRECTIONS:
In the past couple of months we had given the following calls of Investments & Disinvestments from Income/G Sec Funds to Short Term Funds & vice versa:
- Call for switching from G Sec Funds/Income Funds to Short Term Funds when 10 year touched 5.22% after the REPO Rate cut on August 22’2003.
- Call for switching back to Income Funds when 10 year touched 5.36% on September 11’2003.
- Call for booking profits & switching back to Short Term Funds after RBI announced a lower borrowing programme of Rs.25000 crs against the original amount of Rs.60000 crs for the second half of 2003-2004. We gave a call to book profits at every drop in yields from 5.02% till 4.94%.
- 10 year today touched a high of 5.13% & settled at 5.07% at the end of the day on RBI announcement of an OMO of Rs.1000 crs.
Consider the following:
- One day REPO is at 4.50%
- One year T Bill is at 4.37%
- 10 year G Sec had touched a low of 4.94%
When RBI announced a half % REPO Rate Cut in August’03, they were trying to bring the shorter end of yield curve to come down. Instead, both the long end as well the short end rates eased & were as mentioned above. Time & again RBI is signalling that the yield curve is not steep enough i.e. what they have been trying to say is that long end should not have eased & come down as sharply as has been happening in the market.
In the past few days, RBI has done the following to control the sharp drops in the yield at the long end:
- Announced an OMO of Rs.3500 crs
- Announced 28 day REP window for 5 trading sessions to suck out liquidity
- Announced further OMO of Rs.1000 crs.
The current rally in the market was due to two main factors: 1) Liquidity, 2) Expectations of Bank Rate/CRR/ REPO Rate Cut in the forthcoming Credit Policy on November 03’2003.Liquidity does not seem to be a cause for concern ( RBI still tries to control the same by the abovementioned factors). However, if any or all the expectations are not met ( with inflation figures rising on week to week basis), we expect the yields to firm up back to 5.20 to 5.25% levels.
Hence, looking at the present market scenario, RBI interventions on dates when the yields fall sharply, liquidity position etc. we recommend to stay invested in STP ( which will give better Risk adjusted Returns).
Only if you have an investment time horizon of 3-6 months, then switch 10-15% of your investments in STP & Liquid back to Income Funds on yields firming up from 5.10% to 5.15% levels & above.
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