POST RBI POLICY REVIEW & IT’S IMPACT ON SHORT & LONG END OF THE YIELD CURVE
RBI Policy Review had sprung a major surprise by cutting CRR by 50 bp to 5.50% . This was done to infuse permanent liquidity to address the structural pressures on liquidity. In the initial phase, this will infuse liquidity to the tune of Rs.32,000 crs; and over longer period to the tune of almost Rs1.50 lac crs due to multiplier effect.
Immediate reaction of the markets was to assume that since RBI had announced CRR cut, going forward RBI will cut down on conducting OMOs. This immediately impacted the long dated securities which was evident from the intra day movements of 10 year bench mark paper. Post the CRR cut announcements, benchmark yield corrected positively & breached 8.10% for some time before finally settling at 8.35% levels.
Generally, RBI buys long dated securities under OMOs. This was evident from the rally which happened in long dated securities from December onwards when RBI started conducting OMOs. During the same period, there was hardly any movement at the shorter end of the curve of 1-3 years. Following chart will depict this very clearly:
| Date |
1 Yr CD |
5 Yr Corp Bond |
10 Yr Gilt |
|
17-Nov-11 |
9.68 |
9.70 |
8.81 |
|
24-Nov-11 |
9.76 |
9.65 |
8.79 |
|
02-Dec-11 |
9.73 |
9.57 |
8.65 |
|
09-Dec-11 |
9.68 |
9.41 |
8.53 |
|
20-Dec-11 |
9.80 |
9.36 |
8.28 |
|
27-Dec-11 |
9.86 |
9.51 |
8.48 |
|
30-Dec-11 |
9.67 |
9.55 |
8.56 |
|
06-Jan-12 |
9.70 |
9.38 |
8.22 |
|
13-Jan-12 |
9.81 |
9.42 |
8.19 |
|
20-Jan-12 |
9.85 |
9.34 |
8.18 |
| Source: Reliance Mutual Fund |
However, I believe that, given the present level of liquidity deficit, RBI will continue with OMO auctions, giving support to the bond market as the liquidity deficit is expected to increase in the month of March due to advance tax payment, currency leakage and increased economic activity in the last quarter.
Every spike in long dated securities should be treated as an investment opportunity. I had mentioned in my note dated January 17’2012 on AXIS CONSTANT MATURITY SCHEME that debt markets will give enough opportunities from now to March end & hence had recommended investment on weekly basis in the said scheme.
GOING FORWARD: FOR IMMEDIATE ACTION:
Immediate impact of CRR cut will be felt (and is already being felt) in short to medium dated securities in 1-3 year segment.1 year CD has already rallied from 9.98% to 9.80% levels & will rally at a much faster pace once CRR cut comes into effect from Friday onwards. This is exactly what I had mentioned in my note dated January 20’2012 wherein I had talked about the positive impact of CRR cut, rate cuts,etc on the shorter end of the curve. RBI action of CRR cut has aided this process sooner than later.
I would therefore recommend investments in the schemes mentioned in my January 20’2012 dated note at the earliest (read before Friday i.e. January 27’2012)
|
Scheme Name |
AUM |
YTM |
Avg Maturity |
| Axis Short Term Fund – IP |
218 Cr |
9.8 |
2.01 Years |
| Birla Sun Life Dynamic Bond Fund |
3593 Cr |
10.05 |
2.98 Years |
| DWS Short Maturity Fund – IP |
740 Cr |
10.21 |
1.19 Years |
| Kotak Bond Short Term Plan |
945 Cr |
9.8 |
1.41 Years |
| Pramerica Dynamic Bond Fund | |||
| Reliance Short Term Fund |
758 Cr |
9.35 |
2.09 Years |
| Templeton India Corp Bond Opp Fund |
345 Cr |
10.71 |
2.27 Years |
| TempletonIndiaIncome Opp Fund |
3431 Cr |
10.61 |
1.20 Years |
| TempletonIndiaSTIP – IP |
4673 Cr |
10.24 |
0.87 Years |
Comments
Couple of queries
a) What option are you recommending for the above shot term funds- growth or dividend?
b) Templeton India Corp Bond Opp Fund has a steep exit charge. Does your recommendation factor the same.
Congrats!!!!
U were bang on target.
Thanks!!!
Leave a Comment