Mutual Funds expect liquidity easing measures to soften yields on government bonds till the end of 2010-11.
Mumbai: The Reserve Bank of India (RBI) on December 16 stepped in to ease liquidity conditions in the banking system.
The RBI reduced the statutory liquidity ratio (SLR) to 24 per cent from 25 per cent. SLR now requires banks to invest 24 per cent of their total deposits in government bonds. It further decided to buy through auctions Rs 48,000 crore worth of government bonds over a period of one month. The central bank kept policy rates unchanged.
Fund managers expect these RBI measures to soften yields on government bonds. The following are the comments of some fund managers on the impact of these policy actions:
Navneet Munot, Chief Investment Officer, SBI Mutual Fund: SBI Mutual Fund has been running higher duration in our long term bond and gilt funds in expectation of further softening in G-sec yields. Notwithstanding the cautious outlook from a medium term perspective, we expect yields to decline in near term due to favorable demand-supply equation in government bonds.
Sandesh Kirkire, CEO, Kotak Mahindra Asset Management Company: The RBI policy statement has come as a positive for the debt market. The Rs 48,000 crore open market purchases and the reduction in the SLR are indications that RBI is intent on rebalancing the liquidity conditions in the debt market. We remain hopeful that in absence of any commodity shock from the overseas market, we may see the yields moderate in the last quarter of the current fiscal.
Dhaval Dalal Senior VP, Head, Fixed Income, DSP BlackRock Mutual Fund: The RBI has sent a powerful message to the market. We believe that systemic liquidity will ease going forward, albeit, in batches. We do believe that the RBI may take further steps to infuse liquidity as and when needed. However, we believe that the RBI may continue to remain hawkish on rates and may hike rates in the next credit policy meeting, due on January 25, 2011, if commodity prices continue to rise. The decision to buy back the bonds from the market is also seen as a positive step for easing the liquidity in the system. We believe that money market rates are likely to remain subdued in the near-term (at least till the year-end) as market participants focus on deploying their surplus liquidity in the money market assets, amid a reduction in the supply pressure. We believe that Mutual Funds are maintaining a relative high level of cash and short-term assets. We expect government bond prices to rally gradually from here, as market participants look to cover their short positions and deploy surplus cash (from previous bond buy-backs) into liquid government bonds. We like the long-end of the curve (15Y+) at 8.42 per cent which offer relative value over the benchmark 10 year bond currently.
