Invest in longer-term bond instruments as lending rates dips in India

By Vipin Agnihotri

Number of public and private sector banks in India has recently lower their lending rates for consumer borrowings. In my opinion, such a scenario gives investors who have invested in longer-term bond instruments a much-needed opportunity to make decent gains on their investments.

Point to be noted here is that even if Reserve Bank of India holds rates steady, as it is pretty much expected to do, given the increasing rate of inflation, they will still stand to make a neat packet. The pivotal factor here is that even if the inflation rate increases to 5 per cent, from about 4.07 per cent now, there will be enough liquidity in the system to keep growth on track.

As bond fund managers is all set to take a call on the interest rate movements and come up with a portfolio on the basis of their assessment, interest rates is going to play a pivotal role in determining the composition of paper in their funds. In the last two or three months, as interest rates have tended to harden, fund managers are focusing more on longer term bonds, essentially ones that mature in five, 10 or 15 years.

Generally speaking, bonds are of two types, namely, short-term and long-term. It is worth mentioning in this regard that the bonds with higher tenures always have coupon rates that progressively increase. On the other side of the coin, bonds with a maturity of 10 or more years have higher coupon rates to signify the uncertainty of the future as well as the risk of inflation.

The other significant factor on bond price is inflation. When the inflation rate dips bond prices rise even as coupon rates fall. In case if the inflation rate rises, the income from bonds will fail to compensate for the loss of buying power. It has been noticed that exchange rates also affect bond prices, as do international interest rates. In my opinion, money tends to get arbitraged between countries. Big institutions tend to make much of currency arbitrage, borrowing at one rate, earning interest at a higher rate

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Biggest ever acquisition involving the transfer of RBI’s 59.7% stake in SBI-

By Vipin Agnihotri

The Indian government is all set to promulgate an ordinance to close the biggest ever acquisition involving the transfer of Reserve Bank of India's 59.7% stake in State Bank of India (SBI) to the Centre in a deal worth nearly Rs 40,000 crore.

Sources have told The India Street that the finance ministry was expected to seek the Cabinet's approval over the next couple of weeks to ensure that the Centre hands over the cheque to RBI on June 29. It is worth mentioning in this regard that the RBI had offered to sell its stake in all banks and financial institutions to the Centre in a bid to avoid conflict of interest in its role as a regulator as well as owner of some entities.

”Though the Cabinet had approved the proposal in February, the government needs to wait for an amendment to the SBI Act to carry forward the transaction,” pointed out Hiten Tejwani, noted economist. Theoretically speaking, a bill to amend the law is pending with a parliamentary standing committee and the finance ministry intended to insert a clause enabling it to purchase RBI's stake when it came back to the House. But in the absence of the standing committee report, the finance ministry is pushing for an ordinance to close the transaction.

According to experts, the government will value the 31.43 crore SBI shares, which have a face value of Rs 100 each, held by RBI at the average closing price for six months. "It is essentially cash management for 40-45 days since the amount that the government pays to RBI will come back to it as surplus. The transaction has already been factored in the borrowing programme," said a government official while talking to The India Street.

In addition, the government had frontloaded few of its borrowing routine and what is also assisting the Centre is the fact that there are no big payments that are due in July or early August that could have put pressure on Centre's liquidity position. But the chances of some bills raised by other government agencies are also not being ruled out since the government would want to have sufficient cash with itself.

Fact remains that it was earlier toying with the idea of issuing bonds to RBI, which would have been redeemed over 15-20 years. The proposal was, though, junked as it was felt that the exercise might be cumbersome.

If one takes into account the stake purchase plan that has been finalized, the government will issue a cheque on June 29, 2007-a day before RBI closes its annual books of accounts. Normally, RBI transfers the surplus at the end of the financial year (June 30 in its case) during the first half of August and the amount that it received from the government for selling its stake in SBI will come back to the Centre's kitty.