WF: What is your reading on the credit policy?

Nandkumar: The first thing is that when people talk about rate hikes, we would like to highlight that this is the normalization of the interest rates process - it is not about rate increases. The second point which was again stressed in the RBI governors meet yesterday, on the choice of instrument, they prefer the CRR as a tool - the liquidity tool - compared to a rate hike tool because in spite of the fact that we have already seen 6 months of double digit IIP they are still saying that the growth is not pretty wide spread. They didn't want the rate hike to derail any of the growth process. They are more worried on inflation at this point of time rather than growth and that is why the CRR was the preferred tool for them at this point of time.

Having said that we think that interest rates will increase by at least 100 to 125 basis points in FY 2010-11. As growth tends to gradually pickup, rate hikes will be at a pace which will be comforting on the market and not going to be a negative surprise, is our sense. It is going to be kind of the gradual process.

WF: What will therefore be the implications on long end and short end on the curve.?

Nandkumar: In the long end there is not much on the policy process, whereas the monetary policy review was concerned, it was neutral for the long bonds. I think what's spooked the market is the assessment that next year's borrowing program at the net level is going to be somewhere around 3.5 lakh crores, given the fact that fiscal deficit estimate by Government puts the number at 5.5. So that gives a number at a net level of 3.5 lakh crores and at the gross level of somewhere around 4.5 lakh crores given the redemptions of government bonds that we have in FY2011.

And the second point which RBI made was that, probably RBI will not have same kind of tools at their disposal as they had in the past. Given the magnitude of the borrowing program, we would be looking at around 8% for the 10 year benchmark gilt by the first quarter of FY 11.

We will have to observe what kind of reversal of fiscal stimulus the Government takes and what will be its disinvestment target that it will assume in the Budget. That will give the market some comfort and direction on how the borrowing program is going to be managed. Borrowing 4.5 lakh crores means 10,000 crores every week - that's a large number to manage.

WF: What is your take on the short end ?

Nandkumar: One year prime rated CDs are at 6% to 6.5%. Decent quality 1 year corporate paper is around 7.8% to 7.9%. Now, even if you take a reverse repo rate hike from 3.75 to 4%, the spread on 1 year corporate paper is still a very good 380 to 390 bps. That is very very attractive.

Now, in the next 2 months, we are going to see the impact of the CRR hike. Then you will have the advance tax outflows in early March. Any further spikes in rates because of these factors will only make the short end even more attractive.

RBI has reduced its assessment of credit offtake growth from 18% to 16% now. We think that it is going to end up somewhere around 14% or so. If it is going to be 14%, then liquidity will not be so much tight, indeed if it is 16 then there will be some pressure on liquidity on account of credit offtake itself.

As we think these are very very good rates. As we said rates are looking very very attractive at current levels and further spike in the rates, from the current levels, makes it only more attractive. Here the biggest plank is going to be that bond markets are already aggressively pricing in the rate hike. If we take ourselves back to 2004 to 2007 the rate hike cycle when the reverse repo rates were increased from 4.5% further up. Most of the markets were pricing in the early part of 2004 and 2005. And post 2005 and 2007 we actually saw very steady to dropping interest rates scenario. Lending rates and bond rates both were dropping over there. We think that the next 6 months will be similiar to that. We think the bond markets are already pricing in pretty aggressive rate hikes. We think this is a great time for investing in short term bond funds.

WF: Is that also the rationale for the launch of your short term fund?

Nandkumar: Yes, very much. But that apart, by launching a short term fund, we are completing our product basket. But, we are adopting a similar stance in our active bond fund also - of reducing the duration and positioning ourselves to take advantage of tightness in Feb-Mar.

In our new short term fund, we are looking at investing 70% of the portfolio in the 6 months - 1 year segment. About 20% to 30% will be in the 2 year to 5 year segment. Average maturity will be around 18 to 24 months at the end of March and will gradually come down from April onwards.

WF: For investors who look at short term funds now, what is the reasonable return they can target over a 6 month period?

Nandkumar: I think people who invest in Feb-Mar can easily expect anywhere between 150 to 200 basis points out performance compared to money market funds. Money market funds are giving around 4.6% to 4.7% now. That cold move up a little in Feb-Mar.

We have observed that Feb-Mar is a good time to invest - and the tightness remains till about Jul-Aug. We think investors will really benefit by investing in short term funds in the Feb-Mar period.

WF: You would also therefore not recommend people to look at long term funds right now?

Nandkumar: I would not be comfortable recommending duration funds now. Its better to look at funds who have brought down their duration and who are is a position to take advantage of any tightness in Feb-Mar. Of course, a new fund like our short term fund that comes with a clean slate is very well positioned to take advantage of any spikes in this period are ruled out, in terms of existing funds probably fund managers who are earning relatively low duration to take advantage of the probably higher interest rate scenario in feb-mar, will look good, probably a new fund like ours which comes with a completely clean slate will look much better.

WF: Do you have any plans for the FMP's to tap the Feb-Mar expected tightness?

Nandkumar: No, traditionally we have maintained, we are averse to launching an FMP. We have seen plenty of disclosure related issues. We don't propose to enter this area. I think the short term fund, with its open ended nature and full transparency on portfolio, is a much better product for investors as compared to short term FMPs.