I wrote in detail in newsletter dated 9th Feb, 2013 that this is the time to invest in Government Securities. This opportunity broadly comes once in decade wherein safely investor can earn double digit return from Government of India Securities without any kind of direct or indirect risk of loosing capital. At worst, if expected rate cut does not go through, Investor will earn anywhere between 6-8% return in a year.
As I have explained earlier, when RBI cuts 1% interest rate, it translates into 10% returns in long term Government Securities ( Government Securities are bonds or say Debt Obligations issued by Govt of India with a promise to bay back capital and attached interest on it upon maturity). Since, this is issued & promised by directly by Government( and or RBI), it is even more secure than Bank FDs.
In next one year, I expect RBI to cut rate of interest by minimum 1.75%, that can translate into minimum 17.5% return on investments in a year. It is getting more interesting because after one year it attracts only 10% tax on return. Interest on FDs are taxed at 33% or the tax slab individual or firm falls into.
Why RBI will cut 1.75% interest rate in next 1 year?
There are several reasons for that. Let me list few of them…
1. Q3 (third quarter) GDP data of 2012-13 came at decade low of 4.5%. India’s GDP growth had fallen to below 5% in 2003, never after that. This clearly reflects the slowdown in industrial activity, lower consumption, lack of investment and governance deficit.
2. RBI was emphasising on 3 parameters. Inflation, Fiscal deficit and Current account deficit. RBI was not comfortable to reduce IR(interest rates) unless these 3 factors are contained. Inflation has fallen to 6.6% from above 10% near to RBI’s comfort zone of 5%. Finance Minister contained the fiscal deficit at 5.2% as he promised and said to contain it at 4.8% next fiscal. Finance Minister’s actions and promise has relieved RBI. RBI was of opinion that higher Fiscal deficit is translating into inflation hence it should be within the limit of 5%.CAD ( Current account deficit) is most notorious to contain. Close to 40% of CAD is due to Oil imports and 30% is due to Gold imports. Now, Gold is unproductive item for the economy. It does not add value and at the same time it (implicitly)depreciates currency. FM has imposed import tariff duty on Gold Jewellery imported from Thailand, also imposed CTT on trading of Gold in Commodity exchanges and also made PAN card compulsory on purchase of Gold above the value of Rs. 2 lac or more.
Thus, RBI’s concerns are taken care off by FM and therefore the path of rate cuts has been created.
3 Global GDP growth is on continual decline. US GDP growth came down from 4.5% to 1.5%, Germany at 0.5%, France at 0.15%, UK has been contracting for last 2 quarters, South Korea dropped from as high as
9% to 1.5%, Japan at 0.5%. Among Emerging economies India has fallen from 9% to 4.5%, Brazil has fallen from 9.3% to o.5%(last 2 quarters have seen mild improvement), China slipped from 11.9% to 7.4%( last
quarter has seen small uptick). If you combine above nations, it will account for 60-70% of Global GDP(may be more than that). RBI is aware of Global situation and from that perspective also, it has become
imminent to take pre-emptive action to stop further decline of growth and stimulate the economy.
3. As said earlier, Domestic factors are also demanding immediate attention of Mr Banker. Truck sales are down for past 11 months. Tata Motors and Ashok Layland are working only 3 days a week. First time in past 10 years, Maruti stopped Gurgaon plant production because dealers have inventory build up of 1.5 months. First time in last 10 years Car sales growth dipped negative 4.5% and two wheelers dipped to 4.2%. FM expressed concerns of Small and Medium enterprise sector. Capital Goods industry is down for last 3-4 years. Companies sitting on huge cash piles are not investing in new projects.
4. Jog generation plummeted 21% between January to December 2012.
5. Investment banks downsize staff, plan to shift work to Singapore or Hong Kong as deal-making slows.
This is just sneak preview of factors weighing RBI’s next policy moves.
Therefore, I firmly believe RBI’s stance will change from inflation concern to Growth concern and will start monetary easing. It may take 1 to 1.5 year for RBI to fully dispose off the intended rate cuts coupled with other monetary measures to form growth conducive atmosphere.
Historically, India’s growth has bottomed out and started a secular bull run once Repo rate drops to 5% and inflation drops to 5%. Currently, Repo stands at 7.75%.
Hence, it represents an opportunity to capitalize min 17.5% to max 27.% return in next 1-1.5 years.
RBI is meeting on 19th march, 2013.
If you are not invested yet in once a decade, safest of safe opportunity, contact me now.
Blog: https://investmentacademy.wordpress.com/ Cell: 98255 28815
Disclaimer: This is a free daily investment newsletter published by Investment Academy. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. Author might have open positions in the stocks and Indices recommended above.