March 31, 2007

How I am reacting to the interest rate tightening

I got the following comment from ranjit and gave the response below

Hi Rohit,

Today RBI has increased repo & CRR again. Please can you give me your historical perspective on these high interest rates and also what would you do in such situations, would you move into FD's for some time or would you stay invested fully.

hi ranjit

my personal experience with interest rates has been from 95 onwards when i saw the rates move to 15% and since then it has been a downwards stock market positions are not based entirely on interest rates (at least not in the past). if i find a compelling buy, i go ahead with it if the expected returns are good.since 2003 i have moved into floating rate funds and plan to continue . floating rate funds are more tax efficient than FD's and far more liquid , although absolute returns are less

In addition I plan to do the following

1. continue with a laddered approach to fixed deposit investing. What I mean by laddered approach is that I would be investing in FD’s over the next few months across the most attractive maturities. Currently the 1yr+16 day duration seems to be most attractive to me (the 2yr + 16 days gives 0.25 % more , but is not attractive for the extra duration). In addition, I do not plan to put all my funds into FD’s as one go as I do not have an idea how interest rates will move in the next 6 months. I expect them to stay as is or harden a bit, but frankly your guess is as good as mine. So my fixed income investing will be spaced out over the next few months.

2. Continue with floating rate funds which are more tax efficient than FD’s and far more liquid. The absolute returns are low, but they can serve as a good place to park extra funds

3.The bar for the stock market investing is now higher. I generally use a discount rate of 11-13% . I do not plan to revise it.

4. FD’s and fixed income mutual funds have now started to become a viable alternative to investing in index funds. I am not too keen on the index till the index drops by another 20% or remains flat while earnings catch up.

5. Finally, bad time to take any kind of loans – housing or otherwise.

See here for an earlier post on the same topic


RaviAranke said...


It would be interesting to watch out for fallen angels in real-estate space. If the downturn in real estate lasts for some time, I expect Mr. market to throw out the baby with the bathwater. Then there will come time to scoop up some real estate plays who can withstand downturn and emerge stronger.

We have seen how this movie played out during burst. Shares of Yahoo, Amazon and anything to do with internet were thrown out in-toto and provided some very real bargains in 2003.

Of course, one must be ready with a list of fundamentally strong companies and their margin-of-safety valuations.

I am putting together a list of companies in this space who have sound business models.

Here's hoping for some serious downturns.


Rohit Chauhan said...

Hi ravi
think your wish is coming true quite soon.
i personally am not too comfortable about real estate and have special insights. as a result i would prefer to opportunities accross, especially in the midcap range

RaviAranke said...



"The time has come," the walrus said, "to talk of many things: Of shoes and ships - and sealing wax - of cabbages and kings”

Lewis Carroll

I looked at B.L.Kashyap company yesterday. It did IPO, I think, last year. The good thing about companies which went IPO recently is that the offer document spells out the business, the competition etc. in good detail. It also lists the pro-forma income statements and investment bankers' rationale for IPO price.

I thought B.L.Kashyap has a good business model. They are in mainly into developing commercial real estate - IT parks, hospitals, malls etc. and don't own the land. It is build-and-transfer model. They have some marquee clients - who's who of top tier of MNC and Indian companies.

However, it was scary to see how wafer thin their margins (NPM) are. These are in 2 or 3% range and a little slow-down or a little interest rate impact could move them into red.