Rate hike makes short term lucrative, says Suyash Choudhary, Head- fixed income IDFC MF
What impact will interest rate hike will have on the bond market?
We have not seen much impact on bond market as the markets were already pricing in the rate hike. The market expects RBI to hike interest rate further in the coming monetary policy. Over the next two to three months the liquidity conditions will start improving from the current levels.
The pressure that banks are currently facing to keep on raising their deposit rates should start to subside from April 2011 onwards with liquidity easing. Due to these triggers the corporate bond curve which is heavily inverted with one year trading at 10 per cent and ten year at 9.15 per cent, the extent of inversion should begin to correct.
Will FMPs be more attractive?
The rate hike by RBI has not affected the one year CDs. They are dealing exactly at the same level as before the policy announcement. Given the fact that the rate hike was very much expected, from April 2011 onwards demand for FMPs for one year should automatically start slowing down because indexation benefits will be lesser in the next fiscal with the DTC coming into effect.
Which kind of funds will you suggest in the current scenario and for what duration?
We suggest investors to look out for conservatively run short term bond fund apart from FMPs. The duration should be between one year to eighteen months. Given the interest rate cycle and shape of yield curve it makes sense to be on the short end of the curve. Once the yield curve begins to steepen again that time investors can look for investing in longer duration.
