‘CRR cut would be more effective than OMO in managing liquidity’

Debt markets will continue to outperform equity markets, believes Bekxy Kuriakose, associate vice-president - fixed income, L&T
Mutual Fund. In an interview with Vishwanath Nair and Neelasri Barman, she shares the fund house’s investment goals for the next few quarters.

Q: What is your investment strategy? Will it change over the next couple of quarters?
A: We’re managing various types of debt funds, right from liquid funds to ultra-short-term funds, fixed-maturity plans (FMPs) and gilt funds. Every fund has its investment objective. So there is not a particular strategy which we follow as such.

For short-term funds and liquid funds, we are at the short end of the curve and we buy high-quality certificates of deposit (CDs) and commercial paper (CP). For gilt funds and income funds, we go in for medium- to long-term bonds and gilts. As for long-term funds, we have maintained duration on moderate to higher side in the past many months.

In liquid and ultra short-term funds, the investments are primarily in three months or lower maturity money market instruments, irrespective of interest rate conditions. The minimum rating we look for in short-term debt investments is top notch. That is, A1+ by any of the ratings agencies. For long-term bonds, we don’t go below AA. Irrespective of how the market moves, we take a view every day.

Q: Debt funds have emerged better performers compared to equities in 2011. Do you see the trend continuing in 2012?
A: Given the fact that on the economy front you are seeing a slowdown, corporate profitability is getting affected, interest rates are continuing to remain high, the global situation continues to remain bad and the FY13 projections for gross domestic product (GDP) are between 6% and 7%, the chances of the debt market outperforming the equities market remains.

Within debt, FMPs are good, short-term funds are good too. Liquid and ultra short-term funds continue to look good. And, to some extent, gilt and income funds (also appear to be good). (Read the lead story above.)

Top picks would be FMPs, short-term funds, liquid and ultra short-term funds, due to the expectation of rate cuts over the next one year. This would impact short-term debt funds in a positive manner by way of mark-to-market gains.

Q: The RBI has been announcing OMOs (open market operations) every week since December. Do you think the RBI will continue with this? Or, do you see a CRR (cash reserve ratio) cut in the offing?
A: In terms of managing the liquidity situation, I think OMOs may not be enough because the last couple of OMOs have not been so successful. The issue with OMOs is that, they may not be very effective, in terms of infusing liquidity into the system.

If you announce a Rs12,000-crore OMO and only Rs8,000 crore get subscribed, it is not giving comfort to the market. A CRR cut would be more effective in terms of infusing liquidity into the system. I think a 50 basis points reduction would give comfort to the market.

Q: Last week, trading volumes in the 12-year paper were more than those in the 10-year bench- mark. What do you think were the reasons?
A: This is because there is a good spread between the papers (about 14-15 basis points) due to which the paper caught the fancy of the investors. Other reason is that, it is a fairly new paper which does not have a high outstanding. Owing to these factors, the paper became popular.

Typically in a bullish market, long-end securities become more popular as investors can make more trading gains.

Q: The RBI had set up a committee to look into the possibility of enhancing secondary market liquidity in G-Sec and interest rate derivatives markets. What are your views?
A: It’s good if the RBI is doing it. One concern for the debt market has always been that although the volumes have gone up on an average over the last few years, most of them are concentrated in the top two or three securities.

Q: So, maybe, one of the things the RBI committee will be looking at is, how do you increase the liquidity and the depth of market so that, across the curve, you have liquid securities, instead of just the 10-year or 12-year securities?
A: It could also be in relation to why interest rates futures have not taken off, where they may be trying to examine the linkages. The RBI has done quite a bit to help interest rate futures to take off, in terms of modified features, cash settlements, et cetera. But I think banks need to take an active interest in this, especially the public sector banks, because they can hedge as well as trade.

Mutual funds on the other hand are restricted as we can only hedge. Traders too need to take an initiative in expanding the market. The cash settlements which have come for the T-bills should be introduced for government securities.

Q: Considering the view that rates are set to fall, are fund houses building their duration?
A: We have different funds. In the gilt income funds, we have kept duration. On an average, the duration on a gilt fund has been four to six years, while in an income fund the duration has been two to four years.