POST THE RBI CREDIT POLICY REVIEW & ITS IMPACT
- Credit policy is out the way
- Sentiments have gone negative & frequent utterances by RBI officials on giving priority to tackling inflation first and accordingly ensuring that liquidity does not come back into the system in a hurry has also not helped matters
- RBIs clear intention is to tackle inflation first & hence some more rate hikes in the near future
- As mentioned in my previous note on the eve of the policy all the other fundamental and macro reasons still remain the same
- Our system is currently short of liquidity by Rs 40,000 – 60,000 crore. I believe, with this move of increasing the rates, the tightness in the liquidity will continue to remain for some more time. Till we see aggressive spending or reduced borrowing by the government, the liquidity will not return in the system, thus keeping the short term rates elevated
- Govt. borrowing programme has been front loaded with 40% already completed reducing pressure on the latter part of the year
- Inspite of the fact, the 10 yr benchmark has inched-up to 7.85-7.86 % levels, I would treat these as investment opportunities to further increase exposure in the longer end of the curve
- I don’t know whether 10 yr benchmark will peak off at 7.80 or 7.85 or 8 percent level hence I would advise staggered investment in gilt schemes at various levels starting from now
- I would recommend not to invest in bond funds for two reasons :
- There would be exit load issues if one invests in bond fund
- Post the RBI policy review there is a possibility of spread widening between GSec and Bonds going forward
Also, I would recommend that your investment in long term portfolio also should be staggered on weekly basis starting now instead of parking your funds in say 3/6 month FMPs and losing out on opportunities coming your way. Please park that portion of funds in respective liquid plus schemes of those MFs in whose GILT Funds you would like to take exposure to & give weekly switch requests to switch into their G Sec Schemes starting now & staggered till say 3 to 4 months hence. i.e. say if you wish to invest Rs12 Cr in GILT, invest Rs.75 lacs to Rs.1 Cr every week from now to 3 to 4 months hence through Systematic Transfer Plans (STPs). This way you will average your investment without trying to time the market at the same time participate at every high levels of interest rates from say 7.80% to say 8% levels.
Also, 3 to 4 month horizon will take care of any intermittent rate hikes as well as October Credit Policy review.
Comments
Today the 10 year yield has crossed 8%.
Where do you see it going before some correction comes. Advance Tax will also be due very soon and there may be some extra presure on Money Market.
Your views please…
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