Debt fund: Conditions call for short-term play in money market

In the December policy review, the Reserve Bank of India left the repo rate at 6.25 per cent, and the reverse repo rate at 5.25 per cent.
It also continued with its liquidity infusing measures by announcing reduction in bank’s SLR by 1 per cent, and an OMO buyback programme of Rs 48,000 crores of G-Secs (around 1 per cent of NDTL – Net Demand and Time Liabilities of Banks).

Further, RBI has also stated – “Though inflation has moderated, inflationary pressures persist both from domestic demand and higher commodity prices. The risk to the Reserve Bank’s projection of 5.5 per cent inflation by March 2011 is on the upside.”

Stubbornly high protein-led food inflation, possible quantitative easing in developed economies which would drive up commodity prices, attenuating domestic demand to rein in the growing current account deficit were some of the factors considered in taking this stance.

The immediate impact of the policy and the liquidity infusion measure caused the 10-year G-Sec bonds to rally from a yield of 8.08 per cent to 7.99 per cent at present.

Officials of the RBI have stated that they would do an assessment of the inflationary situation in January. What would then be a market mover in the bond and money markets would be liquidity.

By the current and planned liquidity infusion measures, RBI has given a sentiment boost to the bond market. The current illiquidity in the market is also structural with the government of India parking its surplus of around Rs 90,000 crore with the RBI.

Essentially, the current buyback is being financed by using this surplus parked with the RBI. Unless the government starts spending, the current lack of liquidity (roughly to the extent of the above mentioned account) in the market would persist. Of particular challenge to banks would be to finance the credit growth (though sluggish), given the tightness in the liquidity situation.

In light of the above, given the expected uncertainty especially on the global commodities side, and possible hike in diesel prices anytime soon, we would continue to maintain the current duration levels rather than increase them.

We would build more on the short-term money market instruments like CDs (Certificates of Deposit), and CPs (Commercial Paper) which are offering attractive yields and would give adequate liquidity going into the new calendar year in our Bharti AXA Treasury Advantage Fund and Bharti AXA Short Term Income Fund.

In Bharti AXA Short Term Income Fund, we would endeavour to do this through a combination of maintaining positions in PSU (Public Sector Undertakings) short tenure corporate bonds as liquidity in these securities would be higher than 1 year CPs (even though CPs would give slightly higher yields).

This would enable us to exploit the current yield of these bonds in combination with even shorter tenor money market instruments.

Further, an active tactical trading and management of short tenure bonds and G-Secs would substantially enhance returns over a one to three month period.

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