Reacting to the RBI monetary policy statement and the 25 bps rate cut, Lakshmi says that though the cut was expected, the cautious guidance that accompanied it should be taken note of. She provides her perspectives on what this guidance might mean for bond markets and discusses how each segment of the fixed income market may get impacted by the policy statement, how she plans to manage her funds in response to this event and where she sees the best opportunities going forward in the fixed income space.

WF : What is your take on RBI's policy statement and the 25 bps rate cut?

Lakshmi : The rate cut was in line with expectations. There is however an element of caution that has been built into the guidance, which adds an element of uncertainty. The pace of rate cuts was anyway expected to be gradual, but with RBI signalling that headroom for cuts is limited at least in the near term, the timing of further cuts becomes a little more uncertain. It doesn't mean that there will be no further cuts - it just means that there is more uncertainty about the timing of cuts in future.

WF : What is therefore your outlook on rates at the short and long ends of the curve?

Lakshmi : With overnight rates inching down, you will see the shorter end react a little more favourably. The other factor that will support the short end is that we are now at the March end phenomenon, where liquidity is historically tight. In a few weeks from now, as we move into April, the liquidity situation will improve, which is also conducive for rates at the short end of the curve to come down.

The longer end of the curve is less driven by liquidity and more by the direction of interest rates. While the direction of interest rates is clearly down, as discussed, the pace and timing of further cuts is a little uncertain as of now and markets had anyway priced in this round of rate cut. Going forward, the longer end will thus be more influenced by the auction calendar and the open market operations - which is an uncertain element right now.

We therefore believe that the easing will be more immediately visible at the shorter end of the curve. The longer end will take a while longer, and therefore, the opportunistic play lies more in the shorter end right now.

WF : What impact do you see on the broad product categories in the fixed income funds space - including short term and accrual funds, and dynamic and long duration funds?

Lakshmi : Dynamic bond funds and long duration funds which anyway manage the nuances of these interest rate movements, will continue to find favour with investors. These funds give you an opportunity to ride on the rate curve and will move duration in accordance with the movements in interest rates. So, that opportunity continues to be available to investors.

Additionally, with the outlook for the shorter end looking favourable going into the next quarter, investors should allocate more money to short term funds and accrual based funds. While the value proposition for long duration funds continues as before, short term funds is perhaps where near term opportunities are more visible.

WF : What are the changes, at the margin, that you propose to make in your Dynamic bond fund and your long duration products, consequent to today's policy statement?

Lakshmi : Not only as a consequence of today's policy statement, but even earlier, at every rally, we have been gradually reducing the G-Sec component in our Kotak Bond Fund - which is our flagship long duration fund from a peak of 60% in G-Secs to around 50% right now. Corporate bond spreads are becoming quite attractive. We see this 50% exposure to G-Secs gradually moving down to around 40% and that incremental money will be allocated towards corporate bonds in the 1 yr, 3 yrs and 5 yrs segments.

In the short term funds space, incremental deployments will continue in the 1 yr and 1.5 yrs duration segments.

WF : Where do you see the best opportunities going forward in the fixed income space and which of your products are best positioned to tap these opportunities?

Lakshmi : Our flagship Kotak Bond Fund continues to be the product to go to for long term investors, as it is an actively management duration product. Additionally, I think the Kotak Bond Short Term Fund - which has an average maturity cap of 3 years - and which invests in a judicious mix of corporate bonds, is what investors with a shorter time horizon should consider. For the "FMP midset" investors - investors who prefer accrual with relatively less volatility - I would suggest the Kotak Income Opportunities Fund - which is our flagship accrual based fund. It has a negligible G-Sec exposure - hardly 3-4% - and focuses almost entirely on corporate bonds with healthy accruals.