"No fund manager wants to take a risk since even a speculative run on the rupee due to weakness in Southeast Asia may lead to tightening of liquidity," says a Chennai-based fund manager. "Besides, after the run on the rupee early this year and the January 16 measures thereafter, fund managers are on their toes," adds an analyst.

"We are progressively increasing the percentage of exposure to short-term or money market securities from about 37 per cent at present to double that amount," says Escorts Asset Management Company head S Kannan. In the case of ITC Threadneedle's High Interest Fund, 46 per cent of the corpus is in short-term/money market assets while 27 per cent is in the form of cash. Funds normally keep 5 per centof assets in cash to meet any redemption pressure.

"Interest rates are likely to be moving northwards due to rising inflation, the government's borrowing programme, fluctuation of the rupee and a possible pick up in corporate credit demand and growth in industrial fluctuation," says JM Mutual Fund's SV Prasad. The fund has currently kept 47 per cent of its investible surplus in JM Liquid in short-term securities and money market instruments.

Adds Kannan: "There is a likelihood of increase in interest rates across the board by about 100 basis points in the second half of the current financial year." "The liquidity in the banking system is at present very high but there is concern on account of rising inflation as well as fiscal deficit. Thus, interest rates may rise in the medium term," says D Ravishankar at Cholamandalam Cazenove.

According to S Naganath at DSP Merrill Lynch (DSPML), interest rates are likely to remain steady. "There can only be a slight hardening by 25 to 50 basis points in deposits of3-5 years period since deposit growth is robust and credit offtake is dull."

However, even DSPML has roughly 50 per cent of its assets in overnight call to one-year maturity since "a speculative run on the rupee may lead to an immediate hardening of interest rates."

Adds Nilesh Shah at Templeton AMC: "I am expecting a stable to increasing interest rate scenario in the next six months till credit picks up which may coincide with the busy season." Templeton India Income is keeping 35 per cent of the corpus in short-term instruments with average maturity of the corporate portfolio being less than 12 months. The fund expects liquidity to improve considerably with the likely success of SBI's Resurgent India Bonds (RIBs) in 3-6 months' timeframe.

Adds TP Raman at Sundaram Newton: "This is a peculiar situation where short-term liquidity is easy but long-term rates are firm. Though money supply is expected to be easy in the next couple of months, rates may rise in the next 6 months due to seasonal pick-up innon-food credit, replacement of ECBs by domestic credit and apprehensions of a widening current account deficit with lower capital flows." The fund has 50 per cent of its assets in securities with a duration of less than one year.

With returns from the call money market ruling between 5.5 per cent and 6 per cent for almost a month now, funds have also steadily scaled down their exposure to overnight call. "ITC High Interest has reduced its holding in cash from 60 per cent to 27 per cent with the money going to short-term commercial paper," says Sridhar Narayan, fund manager, High Interest.

Adds Kannan: "We are not so much in call, we prefer commercial paper (CP)." In the case of Prudential-ICICI, the entire portfolio of the income fund is in securities which mature within a year.

"We have invested a large portion of our funds in CPs with short maturities," says Ajay Sreenivasan. Sundaram Bond saver is no exception with the fund investing short-term surplus in short-term assets at attractive yields.