Money Funds Beating Stocks, Bonds as Rates Hit Two-Year High: India Credit
Assets in Indian 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 so-called fixed-term plans climbed to 569 billion rupees ($12.6 billion) in the second half, according to Value Research Ltd., which tracks mutual funds. That compares with an 8.3 percent increase in the size of equity plans and 36 percent for debt funds.
India’s central bank sought to curb inflation last year by raising interest rates 1.50 percentage points, the most aggressive move in Asia, damping prospects for stocks and bonds. India’s one-year certificate of deposit rate is 9.56 percent, almost matching the average 10 percent forecast for gains this year in the Bombay Stock Exchange’s Sensitive Index at CLSA Asia-Pacific Markets and Citigroup Inc.
“Short-term yields are very attractive,” said Navneet Munot, who oversees $8.5 billion as chief investment officer at Mumbai-based SBI Funds Management Pvt., a unit of the nation’s biggest lender 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 maturing in a year issued by banks climbed to 9.75 percent on Dec. 29, data compiled by Bloomberg show. 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 Plc.
Deposits Vs Loans
Indian banks borrowed an average 923 billion rupees a day from the Reserve Bank of India last quarter, the most since 2000, as they struggled to meet rising demand for loans. The overnight borrowing rate between local banks was 6 percent yesterday, up from 5.5 percent at the end of last week.
State Bank of India 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 percent, while Housing Development Finance Corp., India’s largest mortgage lender, added 75 basis points to 7.95 percent. Average deposit growth of 15.3 percent during the period still lagged behind a 21.1 percent increase in lending, according to central bank data.
Fixed-maturity plans shield investors from interest-rate volatility by investing in debt of similar maturity to their expiration date. DWS Investments, a unit of Deutsche Asset Management, announced on Jan. 3 a 15-month plan that will invest in corporate debt, government securities and money-market instruments with matching maturities. The minimum investment is 5,000 rupees, 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 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 the central bank 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 basis points on Jan. 3, the narrowest in two years.
The yield on the 7.8 percent bond due in May 2020 slipped 1 basis point yesterday to 8.06 percent, according to the central bank’s trading system. Indian sovereign bonds returned investors 5.2 percent in 2010, compared with 21 percent 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 because of the cash crunch. The benchmark wholesale-price index rose 7.48 percent in November from a year earlier, the commerce ministry said Dec. 14. That was the smallest increase of the year.
The repurchase rate, at which lenders borrow from the central bank, may be raised 25 basis points, or 0.25 percentage point, to 6.5 percent at the next review Jan. 25, according to 11 of 16 economists in a Bloomberg survey on Dec. 15.
“I see large banks offering 9.5 percent on three-month notes by March, compared with around 9 percent now because of tight liquidity conditions,” Krishnamurthy Harihar, Mumbai- based treasurer of the Indian unit of South Africa’s FirstRand Ltd., said in a Jan. 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 percent of local peers last year, said in an interview at the asset manager’s Mumbai office on Dec. 30.
Crude-oil prices in New York climbed 21 percent in the second half of 2010 to $91.38 a barrel. Crude for February delivery was at $88.35 yesterday.
India’s rupee rose 4.1 percent against the dollar in 2010 after gaining 4.8 percent in 2009, and slumping 19.2 percent in 2008. The currency fell 0.8 percent to 45.33 per dollar yesterday.
The cost of protecting debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, fell 6 basis points to 151 basis points on Jan. 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 basis points 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.”
To contact the reporter on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net
To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net
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