As you know, I had recommended G-Sec investments around March-April of this year and I had expected it to return 17% to 22.5% in 1-1.5 years. In immediate following months, RBI’s policy was on expected line and in mere 3 months, portfolios were having returns of close to 6%. But, mid of July things changes quite dramatically. Without prior hint, previous RBI Governor raised short term (MSF) rate by 2% and that spooked G-sec rally in one day. Portfolios were square to 0% in 1 day. Since then, G-sec portfolios have been either in red or with marginal 0.5% to 1% gain.
What are my expectations now?
My expectations were based on few parameters. 1. I expected GDP to come down 2. I expected RBI Governor will emphasise more on growth vs inflation as inflation is more due to supply bottlenecks 3. I expected Gold and Crude will fall further easing inflation pressure and thus giving room to RBI Governor to promote growth. 4. New RBI Governor(Mr. Raghuram rajan) will act aggressively to promote growth and thus will cut rates.
Let us look at Numbers now.
· Jan-March GDP was 5.5%, the latest GDP number came at 4.4%. Full 1.1% lower…
· March inflation(WPI) was 7.28%, it dipped from there to 4.58% and then bounced back to latest number of 7%. Inflation remained around 10% and above in most of 2011 and 2012. Hence, when G-sec was recommended it was coming down from top of 10% after 2 years of consolidation. It is to be seen now, whether it sustains high level and scales up to 10% or it is mere tail effect of Govt and RBI policy and as statistical effect wanes, it declines.
· Gold was trading around $1550 in March, today it is at $ 1230. The Euphoria which was around Gold has also waned.
· Crude was around $97 in March. It went up from there but did not sustain and now trades at $93.
Meaning, numbers are still supportive of the expectation.
RBI Governor is concerned about inflation only at this time and we have discussed in past about factors contributing to inflation. Fiscal and Current account deficit were responsible for higher inflation. Gold and Crude contributed to higher inflation number. As both commodities are coming down( net demand of Gold ,too, has come down), in next 3 months, it will ease the pressure on inflation.
Let me also present some content from HDFC Mutual Fund newsletter. Incidentally, I received mail from them while I was writing. G-sec yield was 8% when I recommended, it is now around 9%
Pls find attached 10Y GSec Yield since 2005. Some interesting observations as under:
- Total number of observations – 2180
- No of times 10Y GSec has traded above 9% – 40
- Ratio – 40/2180 ~ 2%
- Out of 40, 32 times it was in 2008 during global crisis and balance 8 times in 2013 largely due to combination of domestic macro-imbalance arising out of high inflation/ twin deficit and news of tapering in US
It is worth noting that:
- FM is on record that CAD shall be lower at US $ 60 bn in FY 14 as against US $ 88 bn in FY 13. The initial trade data released corroborates he guidance.
- With Govt committed to meet fiscal deficit target of 4.8%, going forward supply of gilts may reduce
- RBI has been resorting to OMOs to infuse liquidity into the banking system which shall cap yields on upper side
- Already, RBI’s FCNR deposit scheme has netted close to US $ 20 bn thereby improving our FX reserves
- Prospects of Indian gilts entering EM bond index (as per newspaper reports) may result into fresh demand for those gilts that are part of benchmark (normally 10Y GSec being most liquid)
- With advent of khariff crop, inflation is likely to moderate in 2014
Against the backdrop, investment in long term gilts can be considered as it offers in-built margin of safety at current levels. We have a product HDFC Gilt LTP that offers exposure to long term Gilts and hence can be considered under the circumstances. ””
Therefore, I recommend to remain invested in G-sec. Though expected return would not accrue in expected time of 1-1.5 years and it will take 6-9 months additional time for the same. But, returns expectations have gone up against that as now yield will drop from the height of 9% or 9.5% and will accrue better returns.
Those who can add more funds in long term G-sec, I recommend them to add more at this level, leaving some gap for 9.5% yield, if inflation persists through March .
If you have not invested in G-sec, it presents excellent opportunity to invest at current yield.
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