Govt Bond prices rallied sharply after the Reserve Bank of India cut the Cash Reserve Ratio from 6% to 5.50%, effective January 28, 2012, thereby releasing around Rs. 32,000 crore in systemic liquidity. There was no rate cut announced today. The Reserve Bank of India also reduced GDP growth target for FY2012 from 7.6% to 7% pa.
Govt bonds rallied sharply in response to the CRR
cut and the dovish tone of the monetary policy. The benchmark 10Y yield, which
was @ 8.13% before the announcement fell to 8.08% immediately after the
announcement. However, profit booking as well as fears of reduction in OMO bond
purchases resulted in a gradual decline in the price of liquid government bonds,
after the Policy announcement. Govt bond yields rose sharply in the afternoon
when the RBI governor, while addressing the media, hinted that the RBI may
review OMO bond purchases going forward.
The benchmark 10Y yield rose sharply to 8.35% pa in response to the comment.
We believe that now may be a great time to enter the govt bond market with a three to six month investment horizon.
Bullish Factors
Let’s look at the factors governing the bond prices going forward:
• This may be the first step towards reduction of interest rates by the RBI, likely to begin in Q2 of 2012. We expect the RBI to cut the Repo Rate by 50 to 75 basis points in 2012.
• The RBI has shifted its focus from inflation to economic growth concerns. We believe that economic growth may surprise on the downside. Moreover, market participants will begin to factor-in possibilities of rate cuts in Q2 2012.
•
Based on the technical
pattern of the benchmark 10Y yield movement (attached here), we believe that
10Y yield is likely to trade between 8.35-55% pa in the near-term. At this
level, the risk-reward ratio may be in favor of the investor with a 3 to 6M
investment horizon.
• The Reserve Bank of India has purchased bonds worth Rs. 72,000 crore through OMO so far. With today’s CRR cut, the total infusion of liquidity will be around Rs. 1,04,000 crore. We believe that the RBI may do more OMO to the tune of around Rs. 35,000 crore to take total liquidity infusion to around Rs. 1,40,000 crore. This should somewhat relieve current tightness in systemic liquidity.
Bearish Factors
• Supply side concerns: Govt bond supply is likely to remain robust this year. With the fiscal deficit remaining elevated, we expect gross government borrowing to be around Rs. 5,50,000 crore in FY2012-13.
• Inflation concerns: The RBI has acknowledged that inflation could surprise on the upside as some of the increase in commodity prices have not been passed through completely. This may result in higher inflation in the second-half of 2012.
Based on these factors, we believe that investors with some risk appetite may consider investing gradually in government bonds with the 10Y yield between 8.35-40% pa. We expect the 10Y to trade around 8.56% (50% retracement from the high) and 8.25% (expected Repo Rate by April 2012).
DSP BlackRock Strategic Bond Fund could be an ideal fund to consider due to its dynamic asset allocation among money market securities, corporate bonds and government bonds. Currently, the fund is under-weight in government bonds with around 9% exposure. We gradually intend to take this exposure to 20-25% at an opportune time.
DSP BlackRock Strategic Bond Fund (DSPBRSBF) is an open ended income scheme, seeking to generate optimal returns with high liquidity through active management of the portfolio by investing in high quality debt and money market securities.
Entry load: Nil, Exit Load: Holding Period <= 7 calendar days: 0.10%; Holding Period > 7 calendar days: Nil. Statutory
Details: DSP BlackRock Mutual Fund was set up as a Trust and the settlors/sponsors are DSP ADIKO Holdings Pvt. Ltd. & DSP HMK Holdings Pvt. Ltd. (collectively) and BlackRock Inc. (Combined liability restricted to Rs. 1 lakh). Trustee: DSP BlackRock Trustee Company Pvt. Ltd. Investment Manager: DSP BlackRock Investment Managers Pvt. Ltd. Risk Factors: Mutual funds, like securities investments, are subject to market and other risks and there can be no assurance that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of Units issued under the Scheme can go up or down depending on the factors and forces affecting capital markets. Past performance of the sponsor/AMC/mutual fund does not indicate the future performance of the Scheme. Investors in the Scheme are not being offered a guaranteed or assured rate of return. Each Scheme/Plan is required to have (i) minimum 20 investors and (ii) no single investor holding>25% of corpus. If the aforesaid point (i) is not fulfilled within the prescribed time, the Scheme/Plan concerned will be wound up and in case of breach of the aforesaid point (ii) at the end of the prescribed period, the investor’s holding in excess of 25% of the corpus will be redeemed as per SEBI guidelines. DSPBRSBF is the name of the Scheme and does not in any manner indicate the quality of the Scheme, its future prospects or returns. For scheme specific risk factors, please refer the Scheme Information Document (SID). For more details, please refer the Key Information Memorandum cum Application Forms, which are available on the website, www.dspblackrock.com, and at the ISCs/Distributors. Please read the Scheme Information Document and Statement of Additional Information carefully before investing.
