In an interview with Capital Market, Murthy Nagarajan - Head - Fixed Income, Quantum Mutual Fund said, Short term funds which invest in 2 to 3 year maturity may give better accrual income.

Excerpts:

1. What are your views on fixed income market? How have the yields moved from pre forex crisis till date?

The ten year yields had moved from a high of 9.46 to 8.80 levels. This is due to the rupee stabilization as RBI shored up its reserves by 34.5 billion USD, restricting gold imports. The rupee for a high of 68 against the dollar came down to 61-62. RBI reduced the MSS rates from a high of 10.25% to 9% levels. The current account deficit also narrowed as imports, importantly gold imports slowed down.

The borrowing program for this financial year is around Rs. 5,97,000 crores. 60% of the borrowing would be done in the first half of the financial year. This would convert into supply of Rs 20000 crores on a weekly basis. The market does not have the strength to absorb this amount of supply. The positives for the market may come from stable government at the centre.

2. What is your strategy for short term funds?

Liquidity situation in this year could be comfortable as we expect RBI to buy dollars to meet its obligation of repayment of 8.5 billion USD in the month of October 2014. Short term funds which invest in 2 to 3 year maturity may give better accrual income.

3. FIIs have shown good interest in the market? Will this continue as we near elections?

FII investment has been pre dominantly in short term T bills, commercial papers, and short term g sec and corporate bonds. Their investments are done mostly for getting accruals as they expect the currency to remain stable due to lower current account deficit. Post-election, if a stable government comes into power, FII investment may invest into longer dated papers as the chances of currency remaining stable or appreciating is high.

4. What reforms you expect for curtailing fiscal deficit?

The fiscal deficit numbers can be reduced only if the subsidies are reduced from the present levels. We expect the government to decrease subsidies burden to reduce the fiscal deficit.'

5. What is your Union Budget 2014-15 expectations?

We expect the new government to stick with the fiscal deficit target of 4.1 of deficit in the current financial year. We also expect the new government to focus on infrastructure investment to boost economic growth.'

6. What's your investment strategy? If the interest rates fall from here what will be your strategy for long term debt funds? What is your advice to the investors as we enter the new financial year?

The Urjit Patel recommendation is for CPI inflation target of 8% by Jan2015 and 6 % in Jan 2016.RBI governor has stated the inflation target should be set by the government and RBI should achieve the mandate. The government may stick to an inflation target of 5 - 6%. Given these constraints, it looks like interest rates cut happen not in 2014 but most probably in 2016. It would be prudent to invest in long term funds when yields are around 9.25- 9.50% levels.

It would be prudent for the investor to invest in short term bond funds or in dynamic bond funds in the financial year.

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