February 15, 2007

Thoughts on inflation and interest rates

The RBI has just raised the CRR by another .5 %. This with inflation at 6.5%, although I feel this inflation is understated as the government’s basket of goods really not reflect an average middle class’s consumption profile. Rentals, education and health care alone are inflating in double digits.

I have never had any specific views on interest rates or inflation. I try not to base my investment plans on any predictions of inflation or interest rates. However that does not mean I don’t to react to it. In the past I have taken the following actions

In 2000-2001, I invested in fixed income debt funds. As the rates fell, the appreciation in these funds was substantial.

In 2003 when the interest rates were at an all time low, I moved my fixed income investments into floating rate funds and went long on by housing debt (see my thoughts on it

With rates hovering in 9-10 %, I have started looking at the option of moving out of floating rate funds into fixed income debt funds of average maturity (4-6 years duration). I have not made up my mind yet on it. I may wait for a couple of months more as I feel that the interest rates may rise a bit further. I am not sure about it and do not have specific views on it, but would wait and watch and react opportunistically to it.

As far as the stock market is concerned, I have been finding a few interesting opportunities such as indraprastha gas which I will explore further in a future post.

Additional comments - 15-Feb

Found this article on GEF (morgan stanley 's global economic forum)


Following comments are worth noting

Excess liquidity conditions in late 2003 and 2004 resulted in banks searching for yield and charging negligible risk premiums for loan assets with inherently higher risks. Just about 12 months ago, banks were making little distinction between pricing credit risk for various types of loan assets. Almost all loans were being priced in a very narrow range of around 7.5-8%, which was very similar to the 10-year bond yields then. Indeed, banks’ lending behavior implied that the risk of lending to a low-income-bracket borrower (for whom there is little credit history available) for the purchase of a two-wheeler was not meaningfully different from the risk of investing in government bonds.

If the past two months’ average credit growth of 30% and deposit growth of 22.5% are maintained, the banking sector SLR ratio will reach its maximum limit of 25% by March 2007.


Prem Sagar said...

Seeing that u invest in floaters and debt funds, do u follow any asset allocation plan?
Indraprastha gas, interesting!

Agree with ur view on inflation, the figure just doesnt represent common man's real inflation!

One thing I didnt understand is whether u stayed in floaters since 2003? The max you might have got on floaters would have been 6-7% in this period I think. And its taxed.

And have you reviewed the Gold ETF by Benchmark launched now?

Rohit said...

hi prem
i dont follow an asset allocation plan. in general my fixed income investment are around 50-60% of my portfolio. i am comfortable with that level of risk.

i have stayed with floater since 2003 as with fall in interest rates, debt funds had even lower returns. in addition bank deposit were equally low in returns. also for debt funds the tax accrued is based on when you sell the fund, so i can delay the tax implications for a long time

i have not reviewed the gold ETF as i am not keen on metals or commodities and generally avoid them as i have no special expertise in them

Prem Sagar said...

Hi Rohit,
Are you thinking of investing in the 370day FMP funds that can help u with double indexation benefits thereby reducing tax outgo? (as purchase is before end of this fin yr and sale is in fin yr 2008-9 so u can claim indexation for 2007-8 and 2008-9)

I think this is one good area to invest in now. Do you have a view?