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Invest in duration funds to gain from rate easing cycle: Amandeep S Chopra

Interview with Group president & fixed income head, UTI AMC

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A 50-basis point cut in the cash reserve ratio (CRR) is not sufficient to address structural illiquidity issues, believes Amandeep S Chopra, group president & fixed income head at UTI AMC. In an interview with Vishal Chhabria and Sheetal Agarwal, he talks about the and for the debt market. Edited excerpts:

What would be the impact of the recent cut?
The CRR cut will not address significant liquidity issues in the very short term, as Rs 32,000 crore is not a meaningful impact when your liquidity adjustment facility continues to be over Rs 1.4 lakh crore. The impact is felt more over a couple of months; it spreads out over a quarter.

Also, it’s not leading to lowering of borrowing costs for banks. So, even as people expect lending rates to decline, we don’t see that happening. I think, at best, it’s more of a symbolic gesture which has improved the market sentiment. Structural illiquidity, which the Reserve Bank of India (RBI) has also highlighted, is very much here to stay. So, the liquidity shortfall is going to stay not just this financial year, but also the next. I think a lot more needs to be done.

Given the government’s fiscal situation, how do you see things moving for the debt market?
From the immediate three-month perspective, you will see the 10-year paper reacting to announcements on the open market operations (OMOs). If there are active by RBI, the 10-year paper will move back to the 8.1-8.2 per cent level. In case they focus more on the CRR impact over the next one-two months and less on OMOs, the 10-year G-secs will revert back to the pre-December level of 8.5 per cent.

The next big event, in our view, will be the Budget and the mid-term review on March 15. Also, Rs 65,000-70,000 crore will move out of the system as advance taxes, putting a lot of pressure. That, combined with the Budget, is going to be a very strong reason for another CRR cut. I think another 100-bps cut is needed to address the core structural illiquidity in the system.

Given that rate cuts are inevitable in FY13, how will you reposition your portfolio?
We are looking at duration funds such as bond funds and short-term income funds, which can capture the gain when the rate cuts start. Even if they (RBI) indicate, on March 15 or closer to the April date, the markets are going to factor that in much earlier, as it’s not going to be a single cut. So, you will see the markets rally well ahead of the second or third rate cut. Some capital appreciation of the price movement can be captured by the bond and gilt funds, as also the short-term income funds. On the liquid funds, the reinvestment will progressively start at lower rates. So, their performance will decline. Thus, we believe duration funds will outperform the liquid category of funds over 6-12 months. We are increasing the duration on funds where we think the rate decline can be captured.

Will you churn your portfolio in favour of lower rated paper, where yields are now higher?
At the beginning of this financial year, we were risk-averse and focused on credit quality, as, clearly, the economy is slowing and you have started seeing part of that in the financial performance of most companies. The margins are compressing, debt ratios are declining and our view was to play safe in terms of credit and focus more on duration. Going ahead, we are looking at a selective increase in playing credit, while still staying long on duration. Even as we will take selective exposure, we still think corporate performance will be an issue for two more quarters.

What strategy are you adopting to maximise returns?
First, we will try to get the interest rate calls right. Second will be to pick credit which would not be downgraded and, at least, benefit from a credit upgrade story. The third strategy will be to identify new credits. There is decent arbitrage available in the sense that a lot of corporates who were going abroad to borrow on lower rate of funds have started coming back, as a lot of foreign/lending entities are shrinking their balance sheets. We are going to use that very actively. We have looked at a lot more newer names than we had over the last six months.

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