Fixed deposits back in limelight
Bond yield may rise further
Madhu T, TNN 7 December 2009, 12:03am IST
MUMBAI: Uncertainties in the bond market are giving risk-averse clients the jiiters. The advice given by some investment consultants to these clients, who want to park their money in debt instruments: ‘‘Go back to traditional products like FDs, postal saving schemes and senior citizen schemes.’’ Thanks to the uncertainties in the bond market due to a lack of clear direction on future interest rate movement, these experts are asking clients to keep off debt mutual fund schemes.
‘‘We have been asking clients to stay away from debt schemes for the time being. If you are going to park money in a debt scheme for two or three years in a short-term fund or liquid-plus funds, you can hope to get only around 4.0-4.5%,’’ says Kartik Jhaveri, director, Transcend Consulting. ‘‘It seems like rates are going to tighten soon and long-term bond yields are likely to go up. If you are holding medium-to-long-term debt, you are likely to face losses,’’ he adds. ‘‘The advice is based on expectations of a interest rate hike. If the rates go up, debt schemes may give negative returns,’’ says Mukesh Dedhia, director, Ghalla & Bhansali Securities. ‘‘If you put money in a fixed deposit or similar avenue, you are at least assured of a fixed interest on maturity,’’ he adds.
According to experts, nobody want to take a call on interest rates — though many expect it to go up anytime — as they are not sure when RBI would start tightening its policy rates. ‘‘Everybody knows that the RBI would start hiking rates soon, but when will it eventually happen, nobody knows. Even if it happens, we don’t know whether interest rates would go up immediately, since there is no great demand for credit at the moment,’’ says a senior debt fund manager, who doesn’t want to be named.
‘‘Even if the RBI hikes rates by 50 basis points (100 bps = 1%), there won’t be much impact on rates. But that is a theory, we don’t know if it will pan out,’’ he adds.
Despite the odds, Dedhia says he would still recommend long-term debt schemes to investors who are ready to park money for three to five years, as he expects the yields to even out in the long term. Also, he says he would recommend laddering technique to investors to ride varying yields over a period.
For the uninitiated, laddering (similar to SIP —in equity) advocates investing money in debt schemes at regular intervals. ‘‘If you park your money anywhere at one go, it will also come back as a chunk at some point in future. That means it carries a reinvestment risk. You have to invest the money again at whatever avenue and rate available for you at that point of time,’’ say Dedhia. ‘‘But if you spread out your investment over a period of time, you can invest at different yields prevailing at that time. It will average out your returns, also the money wouldn’t come at one shot,’’ he adds.
BS Reporter / Mumbai December 07, 2009, 0:33 IST
The yield on government bonds may continue to move up, on apprehension that Reserve Bank of India (RBI) may harden the monetary policy stance soon to manage inflationary expectations.
The prices of bonds may fall sharply if fears of tight monetary policy persist, dealers said. On Friday, the G-Sec market fell sharply by 30-50 paise, amid rumours that the central bank may raise the reserve requirement.The benchmark 10-year 6.90 per cent 2019 paper closed at Rs 96.10, implying a yield of 7.47 per cent. Yield had closed at 7.19 per cent last Friday (November 27).
The Centre and 19 state governments have lined up bond auction plans to raise Rs 28,500 crore from the market next week.
The government, after raising Rs 10,000 crore on December 4, will again tap the market on December 11, to raise Rs 10,000 crore again through bond sale.
Call rate may remain soft
The interest rates in inter-bank overnight lending market are expected to remain soft on comfortable liquidity in the system.
The overnight call rates moved between 3.10-3.35 per cent. On Friday, the absorption by RBI under Reverse Repo operation fell sharply to Rs 63,080 crore from Rs 1,25,920 crore yesterday. It did not infuse any amount under repo operation.
Rupee to remain range-bound
The rupee may move in a range, tracking trends in flow of capital in the stock market and fluctuation in the value of the dollar in global currency market.
On Friday, the rupee weakened considerably, to close at Rs 46.30 against the dollar. The forward premium rates eased over previous day’s levels. The six-month forward premium was 2.79 per cent.
The portfolio inflows, mostly from foreign institutional investors, of more than $19 billion have helped the rupee rise more than 13 per cent this year from a record low of 52.2 in early March 2009. In the currency futures market rupee contract for December 29 was priced at 46.34 in last trade.
People expecting rate hikes in the review in Jan end. I guess good time to repatriate money to Desh before rupee strengthening?