Assets in money-market funds with fixed payout dates doubled in the past six months, outstripping stock and bond funds, as the worst cash crunch in 10 years drove short-term bank debt rates to a two-year high.
Money under management at the so-called fixed-term plans climbed to Rs 56,900 crore ($12.6 billion) in the second half, according to Value Research, a firm tracking mutual funds. That compares with an 8.3 per cent increase in the size of equity plans and 36 per cent for debt funds.
The Reserve Bank of India (RBI) sought to curb inflation last year by raising interest rates by 1.50 percentage points, the most aggressive move in Asia, damping prospects for stocks and bonds. India’s one-year certificate of deposit (CD) rate is 9.56 per cent, almost matching the average 10 per cent forecast by CLSA Asia-Pacific Markets and Citigroup for gains this year in the Bombay Stock Exchange’s Sensitive Index.
“Short-term yields are very attractive,” said Navneet Munot, who oversees $8.5 billion as chief investment officer at Mumbai-based SBI Funds Management, a unit of State Bank of India. “If one wants to avoid the volatility of equity and bonds then this is a great investment.”
Rates on short-term debt issued by banks and maturing in a year climbed to 9.75 per cent on December 29. That was the highest level since the 2008 financial crisis, according to Udayan Chakrabarti, vice president of emerging markets fixed-income trading at Royal Bank of Scotland Group.
Deposits vs loans
Banks borrowed an average Rs 92,300 crore a day from RBI last quarter, the most since 2000, as they struggled to meet rising demand for loans. The overnight borrowing rate between local banks was six per cent yesterday, up from 5.5 per cent at the end of last week.
SBI sought to ease its shortage of funds by raising one-year deposit rates by 2.25 percentage points since July 30 to a 22-month high of 8.25 per cent, while HDFC, India’s largest mortgage lender, added 75 basis points (bps) to 7.95 per cent. Average deposit growth of 15.3 per cent during the period still lagged behind a 21.1 per cent increase in lending, according to central bank data.
Fixed-maturity plans shield investors from interest-rate volatility by investing in similar-maturity debt to their expiry date. On January 3, DWS Investments, a unit of Deutsche Asset Management, announced a 15-month plan that would invest in corporate debt, government securities and money-market instruments with matching maturities. The minimum investment was Rs 5,000, it said.
Yield curve
“Liquidity continues to remain tight,” Kumaresh Ramakrishnan, a fund manager at DWS, said. “Consequently, rates on the short end of the curve have gone up sharply on account of a much lower deposit growth, compared to credit growth and large cash balances of government with the central bank.”
The nation’s 10-year bonds rose last week after RBI repurchased debt to ease the cash crunch in the banking system. The difference in yields between two- and 10-year government notes shrank to 31 bps on January 3, the narrowest in two years.
The yield on the 7.8 per cent bond due in May 2020 slipped one basis point to 8.06 per cent yesterday, according to RBI’s trading system.
Indian sovereign bonds returned investors 5.2 per cent in 2010, compared with 21 per cent in Indonesia, HSBC Holdings Plc indexes show.
Current account
India’s inflation rate remains at “elevated levels,” the central bank said in a December report, signaling it may resume raising interest rates after keeping them unchanged due to a cash crunch. The benchmark wholesale-price index rose 7.48 per cent in November from a year earlier, the commerce ministry said on December 14. That was the smallest increase of the year.
The repurchase rate, at which lenders borrow from the central bank, may be raised 25 bps, or 0.25 percentage point, to 6.5 per cent at the next review on January 25, according to 11 of 16 economists in a Bloomberg survey on December 15.
“I see large banks offering 9.5 per cent on three-month notes by March, compared to around nine per cent now because of tight liquidity conditions,” Krishnamurthy Harihar, Mumbai-based treasurer of the Indian unit of South Africa’s FirstRand, said in a January 4 interview. “Rates will stay high as inflation is rearing its head.”
Stock risks
Indian stocks, the world’s best performers last year, are “fully valued” and may decline as overseas inflows into the nation’s equities moderate, according to DSP BlackRock Investment Managers Pvt.
“There’s uncertainty related to factors like inflation, oil prices, interest rates and political stability,” Apoorva Shah, who co-manages the DSP BlackRock Micro-Cap Fund that beat 99 per cent of local peers last year, said in an interview at the asset manager’s Mumbai office on December 30.
Crude-oil prices in New York climbed 21 per cent in the second half of 2010 to $91.38 a barrel. Crude for February delivery was at $88.35 yesterday.
Rupee rose 4.1 per cent against the dollar in 2010, after gaining 4.8 per cent in 2009, and slumping 19.2 per cent in 2008. The currency fell 0.8 per cent to 45.33 a dollar yesterday.
The cost of protecting debt of government-owned SBI, which some investors perceive as a proxy for the nation, fell six bps to 151 bps on January 4. Prices for the credit-default swaps, which pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements, climbed 42 bps last year.
Fixed plans help save more as returns are allowed to adjust for inflation before being taxed.
“Fixed maturity plans have been in demand and money coming into such plans could well attain their previous highs again,” said Dhirendra Kumar, managing director at Value Research. “For a fixed income, large investor, this is the best vehicle in town.”
