(1888PressRelease)
July 26, 2007 - ING Group has promoted ING Investment Management (India) Private Limited as a company incorporated in India for the purpose of carrying on asset management activities. The fund house manages assets worth Rs. 5080.97 crore at the 30th June 2007 (excluding AUM of fund of fund schemes)
A view on “Why a 1yr FMP at around 9% portfolio YTM is a good investment option given the current debt market scenario” by Ramanathan K, Head-Fixed Income, ING Investment Management (I) Pvt. Ltd.
1. The background
March 2007 was indeed the best month for investors in 1 yr FMPs with net FMP yields as well as YTMs of 1yr CP/CDs in the range of 10.5-11%. Added to this there was a benefit of double indexation which made the post tax returns even more attractive to investors. As expected the 1 yr CP/CD rates rallied by around 1-1.5% in the months of April/May 07. These rates continued to drift at these levels for a week or so in May despite overnight rates at almost zero levels. The reason for this was that, the markets feared RBI action by way of CRR/high MSS issuance to drain out excess liquidity.
The biggest surprise, which caught the market unawares was that while RBI continued its action on the MSS front the amount paled in comparison to the liquidity additions into the system (due to a combination of deposit growth, drop in credit off take and huge forex flows / sterilization). The lack of significant action by RBI (large MSS amounts / CRR hike), continued flows into liquid funds and almost zero percent overnight rate for more than 2 months has resulted in the 1 yr CP/CD rates coming off from 9.5% levels in April-May to the current 7.25-7.5% levels (a fall of close to 2%).
2. Was such a fall in corporate CD/CP/bond level expected?
No. Turning this question around - had anybody fathomed earlier that RBI would allow almost zero overnight rates for 2-2.5 months? The answer is no. With every fall of 25 bps in yields the market perceived the levels to be even more risky (due to fear of RBI action) than before.
3. Why do you think RBI has allowed the almost zero overnight rate to continue for so long?
A possible theory – to stem significant currency appreciation from current levels in the short-term. The huge forex flows has resulted in the INR appreciating significantly (in a short time period) against the dollar, thereby impacting exporters negatively. The market players had also built up a fair amount of dollar short positions (which take benefit of the higher overnight rupee rates) expecting further currency appreciation. It is possible that given inflation coming off to around 4.25% levels and credit off take slowing down, the focus of RBI has slightly shifted from managing inflationary expectation to managing the USD/INR. This shift in focus has, what we believe, given RBI breathing space to focus on USD/INR – reducing the attractiveness of dollar shorting.
4. Do you think RBI would be comfortable continuing almost zero overnight rates for some more time?
This is the key question that the market is grappling with. One school of thought is that – with inflation coming off and credit off take slowing RBI could allow continuation of easy liquidity thereby continuing its focus on dollar shorts. The other school of thought is that – with IIP numbers showing continued robustness RBI would not allow unabated money supply to impinge on the already aggressive levels in the market and could therefore come out with measures of CRR increases and possibly additional liquidity drain out measures.
5. Given this uncertainty on RBI measures on July 31, should investors invest now in a 1yr FMP if the portfolio yield is around 9%? Aren’t they better of waiting until the policy?
If RBI comes out with significant liquidity drain out measures in the policy we expect a increase of 1-1.5% in the 1 yr CP / CD rates i.e. the 1 yr rates (currently at around 7.25-7.5%) could back up to around 8.5%-9% levels. If RBI does not come out with any measure then rates could come off by around 1%. The rates for higher yielding papers in today’s market should help in generating a YTM of around 9% for investors in a high yield FMP. Hence even if RBI does come out with significant measures the investors on a return basis, we believe, would not be worse-off, albeit they would have to accept the slightly higher credit risk. If RBI does not come out with any measures the investors would surely benefit as they have already tied up funds at higher yields. In summary either ways it makes sense for investors to invest in an FMP if the portfolio YTM is around 9% (carrying slightly higher credit risk).
6. Why invest in 1 yr FMP with portfolio YTM of around 9% rather than invest in short term plans?
If RBI does come out with measures and rates back up by 1-1.5% the returns in short term plans would not be up to expectations, due to the loss in the marked-to-market component of the portfolio. If RBI does not come out with significant measures then there could be good market-to-market gains in a short time frame. As we all know the short term gains would average out over a period of 3-6 months and holding period returns would come back to single digits. Hence if rates do come off, an investor would be equally happy locking his investment in the 1yr FMP.
Disclaimer: The above opinion is that of Mr. Ramanathan K, Head-Fixed Income, ING Investment Management (IIM), India Pvt. Ltd. & is for reference only. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of. companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an Investment. The investment discussed or views expressed may not be suitable for all investors. IIM, India has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of opinions/in house views incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ING Investment Management (India) Private Limited. Neither the The Mutual Fund, nor the company/Directors/Trustees or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
