Sanjay urges investors to look beyond short term funds and even flexi debt funds and consider income funds as longer duration products may provide healthy returns in a falling interest rate environment that seems likely to set in later this fiscal year. He welcomes the new sectoral caps, as he sees non NBFC companies coming in more actively now to tap MF money. He believes RBI will continue its caliberated approach of balancing legitimate growth concerns with equally important inflation concerns.

WF : What is your take on the recent RBI policy announcement? Does this mark a significant change in stance or is it still a fight against inflation that is RBI's primary concern?

Sanjay : RBI has been focussing on fighting inflation for long time with some success. The inflation drivers are at times exogenous such as fuel prices, food prices or constrained by supply side factors. Monetary policy provides limited influence over such factors. However, RBI has also been expressing its views regarding the quality of the government expenditure and levels of twin deficit (fiscal and current).

Though the economic growth rate concerns are valid RBI needs to balance the inflation and growth dynamics.

WF : Can we expect a declining interest rate regime to set in anytime soon or are we likely to be in the same range until the end of this fiscal year?

Sanjay : RBI has been stating that interest rate alone cannot jump start the investment cycle in the economy. The government has shown reforms intent with diesel price increase, relaxed norms for FDI in certain sectors and the power sector package. We expect that the rate cut pressures will dominate over the next 2 quarters, if the government continues with the reforms agenda.

We expect that the further repo rate easing may set in sometime in the last quarter of this financial year. However, market yields will keep lower due to low credit offtake till such time.

WF : Is this a good time to get into long bonds or should one tread cautiously for now? What are the factors that are influencing your view on long bonds now?

Sanjay : One should look to increase duration in the portfolio due to following factors:

• Growth in economy is slowing down, which will prompt rate cuts

• Government has acted partly on fiscal consolidation as well as reforms

• Over 65% of fiscal borrowing has been completed in the first half

• Liquidity tightness may prompt the RBI to take up OMOs sometime during the Oct - Dec quarter, which will help G-sec yields

WF : How are you positioning your Flexi Debt Fund now in terms of duration as well as credit profile?

Sanjay : We are looking at active duration management with high grade credits in the HSBC Flexi Debt Fund. The high grade credits are liquid and thus provide us with the requisite flexibility to change duration quickly.

WF : How do the new sectoral caps impact fund managers like yourselves?

Sanjay : Sectoral caps are a welcome change. It adds to diversification to the fund. We are largely in line with regulations. Sectoral caps will encourage credit in non-financial sectors to approach markets more frequently.

WF : Are short term funds still a good bet or is it time to move into more flexible products like Dynamic Bond funds and Flexi Debt funds for investors who have 6 months plus money?

Sanjay : Short term funds depend on accrual to earn large part of their income. This still remains in place. Thus it will provide returns closer to accruals with some duration benefit due to steepening of the curve.

Flexi debt products as a result of active duration management, may provide higher returns from duration. These also have inherent volatility risks. The investors should understand these risks before taking call on flexi debt products.

I would also urge investors to look beyond dynamic duration products into income funds. These may be a good bet bet in falling interest rate scenario as the duration holding is higher in these funds.

WF : What are the biggest risks you see for fixed income markets for the rest of this fiscal year?

Sanjay : Risk to the current scenario remains largely from:

• Global scenario : Higher oil / commodity prices may change the rate easing scenario and fuel inflation

• Domestic political scenario: If the political intention of reforms weans in the near future we may see an impact due to supply slowdown, rating downgrade amongst other factors. Thus, it remains a major risk.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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