| Life After IMDs |
So, we’ve done it again! Proved to the world, that our NRI
brethren have some loyalty to India. They do bail us out when our need is dire. After the
whopping success of the Resurgent India Bonds, we now have in our kitty over $5.5 bn which
have come in through the recent IMD issue. The FM has gone hoarse crying that this money
has been raised at competitive rates and so on and so forth. He has also explained in
detail the spiraling oil prices and their adverse impact on our oil import bill which has
taken its toll on the Rupee by depreciating t over 7% from the beginning of this fiscal.
At the current price of USD 33/barrel our oil bill has ballooned by USD 10 ban and this
has contributed to a further negative sentiment on the Rupee.
The RBI proposed to invest 40 per cent of the IMD funds in government securities, which,
carried coupon rates in the range of 10.95 to 11 per cent. The remaining amount was to be
invested in the infrastructure sector, directly and indirectly. Also 50 per cent of the
amount mobilized by the collecting banks, would be retained by them at an interest of 10
per cent per annum for investment in the infrastructure sector. This investment in
infrastructure sector projects and bonds was to yield "anything between the PLR and
15 per cent".
But all that is past history-now that we
have the money, what is the impact going to be on the financial markets?
The RBI chief has clearly said that the money will be used to prop up the rupee as and
when they feel it needs propping. So the problem lies in determining the prop level-i.e.
at what price does the RBI want the rupee to be vis a vis at what price the market forces
drive the rupee to be. RBI seems to be fixated on the rupee value at Rs 46.90 per dollar,
whereas the market seems to think that keeping in view the external influences- like
soaring oil prices, falling Euro and Asian currencies has etc. the rupee seems overvalued
to the extent of 2% from the current levels and feel that the central bank should allow
gradual depreciation in the home currency to ensure the required correction. Infact all
indications are that the Rupee exchange rate may touch 47.10 during December.
One thing is but evident, that the IMD flows will increase the liquidity in the system, which should drive the short-term interest rates lower. And this is precisely what happened on December 7th, 2000 when private sector and foreign banks took the lead in lowering their short term deposit rates by 25-75 basis points. According to the banking community, the call rates are ruling steady at and there was no dearth of supply which prompted the cut in the rates.
Mutual fund managers, especially those of debt funds are also of the opinion that the interest rates will rule easy to steady till March 2001. The view is that the government will find it easy to control the money supply in the short term through its market operations. However, in the long term , the IMD money will be used to cushion the economy as well as the currency against the external shocks which will persist till the oil hike impact is absorbed.
This against the back drop, where the government’s borrowing program seems more or less on line, with few overruns expected till the end of the fiscal, as well as the demand from the corporate sector too, as per the anticipated credit offtake figures, means that easy liquidity conditions will exist.
From the point of view of the common investor, this would mean that you are now going to receive less return on your short term fixed deposits, however, remember, when the interest rate goes down the bond prices go up, in this case probably the short duration liquid funds like gilt funds or G-Sec funds should do well. Also overall though this fall in interest rates may or may not filter into the long term end of the market, the easy liquidity conditions will prevail there also. This means that debt funds will start looking up. In the past couple of months the corporate bond issues were very few but the banking sectors appetite for the corporate bonds has ensured the bond issues are getting fully subscribed at attractive rates. So we should expect to see some amount of heightened activity in that segment too. So may be as investors one would do better to concentrate on the gilt/G Sec/debt or balanced mutual funds so as to reap the twin benefit of the market bottoming out and may be a further cut in the interest rates.
Aru Srivastava
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