Fundmen Cautious On Crr Reduction

The mutual fund industry is reacting with caution to the Reserve Bank of India's (RBI) proposal to bring down the cash reserve ratio to 3 per cent in one shot.

Fund managers are of the view that the CRR cut has to be viewed in the context whether there is a lowering in other rates in the system -- the repo rate, the small savings rate, bank rate and other administered rates.

"We have to see what other adjustments are made in the system and how much inflows actually take place before we can assess the impact on the market," said Dhawal Dalal, debt fund manager, DSP Merrill Lynch Mutual Fund. Lowering of CRR, however, is being seen as a positive happening by the sector.

"Since there is substantial liquidity in the market, lowering of CRR will definitely lead to a downward push on interest rates," Dalal said.

If there is a 100 basis point downward trend in rates, this would increase returns on fixed income plans, across a five-year duration, to 11-12 per cent. At present, returns range between 8 per cent and 8.5 per cent. Other measures which will form part of the package such as reducing refinance facility, restricting primary dealers' access to the call money market and capping bank borrowings would actually negate the impact of the CRR cut.

"Further, we have to know whether the government plans any auctions which could suck the liquidity out of the system," he said. According to Milind Nandurkar, fixed income fund manager with Sun F&C Mutual Fund, RBI's proposal should be viewed more as a "transmission of monetary control" to the market.

Whether the cut will happen at once or will be staggered will also be an important factor in how it impacts the market.

"However, changes in savings rates and repo rate will actually determine whether the yield curve moves down or not," he said.

However, he also admitted that it was a good step which would boost the market sentiment. Profits can definitely be made in the short-term in the softening interest rate bias, fund managers felt. Funds invested in five-year papers could book profits in the short-term with a lowering in the interest rate, but then the returns will more or less remain stable. Rajagopal K, chief investment officer, fixed income, Il&FS Mutual Fund, said that they would have to take into account the existing maturity profiles of their investments.

Incidentally, the market has been expecting a softening in rates for some time now and in preparation have been increasing their duration across their fixed income portfolios for the last couple of months.