Inflation likely to remain in 7-8% range during 2013

The benchmark 10-year bond yields are currently hovering at about 7.87% pa. How do you see the yields moving in the coming weeks?

We continue to expect one more repo rate cut by April 2013. Our base case is that the RBI will pause after that, for the rest of the year, unless there is a major correction in crude oil prices going forward. This should result in the benchmark 10-year government bond yield trending towards 7.70-75% pa in the near-term.

How has the past year been for debt funds?

The calendar year 2012 has been decent for debt funds with most categories of debt funds delivering average returns of between 9.5% and 10.5%. Dynamic Bond Funds, which can change their asset allocation quickly, as well as gilt funds have particularly done well due to a decline in interest rates since September 2012.

Which debt products do you expect to do well?

We expect one more repo rate cut of 25 basis points by April 2013. After that, we expect the RBI to pause. Based on that, we expect high quality long duration funds to do reasonably well in 2013. We also expect the yield curve to steepen gradually with short-term yields getting adjusted to the new funding rates while long-term yields remaining range-bound depending on supply-demand dynamics.

What is your advice to investors at this point?

We advise investors to invest in high quality medium and long duration funds based on their risk appetite for an investment tenor of around six to 12 months. While investing, we expect investors to take into account the fund's quality of assets, its risk-management practices, the fund manager's views as well as investment processes to get further comfort on their investments.

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