Rama Krishna Vadlamudi,
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Dear
Friend,
After
WPI (wholesale price index) inflation unexpectedly rose to 5.79% in Jul.2013
from 4.86% in Jun.2013, the bond markets fell sharply and the 10-year G-sec
yield has closed at 8.50% on 14Aug2013. This indicates more than 100 basis
points rise in 10-year G-sec yield in the last one month or so. The rise
reflects:
1.
Reserve Bank of India 's
liquidity tightening measures, undertaken after July 15th, purported to stem
Indian rupee's fall against US dollar.
2. The
inability of the Central/State Governments and RBI to control inflationary
expectations and trends in the Indian economy. While manufacturing inflation is
contained by vitiating investment climate in the country, the authorities (RBI
as well as the Governments) have been unable to do anything meaningful in
controlling food and fuel inflation. The self-made fiasco has been going on for
the past four to five years under the Manmohan Singh leadership.
3. The
realisation by the market participants that the authorities are not in a
position to control either fiscal deficit (before 2014 General Elections) or
current account deficit.
4.
Complete failure of the management of external value of rupee, especially in
the last six to nine months, on the part of RBI and the Central Government #.
(# Even as I was posting
this article on my blog, news has broken out that the RBI has taken certain
steps to control overseas direct investments and outward forex flows. My
initial reaction to these measures is that these are regressive steps taken
under panicky conditions.)
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As
you're aware, markets are integrated—meaning that what is happening to rupee is
impacting bond as well as stock markets; and what is happening in bond markets
is affecting both the rupee as well as the stock markets. To sum up, the stock,
bond and currency markets are closely interlinked. The inter-dependence does
not end in domestic markets. All the financial markets have been dancing to the
tune of global developments, almost on a daily basis, particularly in the last
one decade. You've seen how violently the Indian bond markets reacted after the
US Fed in May/June 2013 hinted at tapering its quantitative easing or QE3 bond
buying programme.
My
point is that we need to have an understanding of all these markets—both
domestic as well as global—to be able to exploit any mispricing of securities.
I think
Indian bond markets are poised to offer good investment opportunity for
investors with a time horizon of two to three years. I think we're inching
closer to getting better opportunities. Ordinary investors like us cannot time
the markets. However, we can start investing in some good debt mutual funds,
which have exposure to long term bonds. When interest rates start to fall,
prices of long term bonds will rise much faster compared to short term bonds.
Hence, you can consider exposure to some long term bond funds to exploit the
opportunities thrown up in the market, depending on your risk appetite.
If my memory is correct, the previous high of 10-year G-sec
yield was around 9.55% in 2008. Investors who bought bonds at a yield level of
9.50% or 9.00% had reaped phenomenal returns in the next three months.
If the
10-year yield rises to 9.25% or 9.50% in the next few weeks/months, it'll be an
excellent opportunity for bond investors. But I doubt whether RBI will allow
the 10-year G-Sec yield to rise to 9.50% or above. (RBI is the banker to the
Central Government. RBI always takes
care of the Government's interests. If bond yields rise, the interest cost for
the Government goes up. So, RBI always tries to keep the yields lower in order
to protect the government.) So, the safe option is to invest in long term bond
mutual funds, when the 10-year G-sec yield reaches a range of 8.75% and
9.25%.
If
there is too much panic in bond markets, because of inflationary concerns or
something to do with the rupee, then bond market may react feverishly creating
excellent opportunity for bond investors with a time horizon of two to three
years. Disclaimer: Please check with
your competent financial adviser before making investments. This post is meant
for information purposes only. You can select some gilt mutual funds by doing
thorough research or after consulting your adviser.
Sharing is Winning,
RamaKrishna Vadlamudi
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