Indian bond yield has went up across the yield curve by 50 bps during this week in response to de-facto tightening by RBI to shore up the value of INR against foreign currencies. RBI has capped the funds available at Repo Rate to INR 750 billion while additional funds will be available at 300 bps above Repo Rate. This will help curtail the speculation of going long on foreign currency against INR as holding foreign currency become expensive. In addition, hopefully, higher interest rates will lure back the foreign debt investors, which have been selling from late May 2013.
The key question now, a la 1998 & 2001, will RBI / Government will follow up with the measures like issuance of offshore bonds to augment its foreign currency reserves. The key difference between this time and the similar events in the past is that currently, we are facing real high demand for foreign currency for variety of reasons like maturing short term foreign loans in the current financial year, falling exports & stagnant import etc. Persistent higher international prices and large imports of gold has created additional demand for foreign currency to import.
Equities remain resilient though earning would be under pressure, going forward, for the sectors which are already suffering from high debt overhang and slowing economy. Sectors like PSU banks, Infrastructure, Metal, Telecom, Hotel etc. which are already under various economic pressure will now be facing higher interest burden as well if the current measure persist for long. Further, lots of companies have taken debt denominated in the foreign currencies which is as high as 70% of the outstanding debt, will also feel heat of additional burden on account of strengthening in foreign currency. This will be mitigated to the extent of hedging done for debt in foreign currency.
As always thoughtful selection of asset allocation and careful investment will yield handsome return in the long term. One should make use of these inflection points judiciously to build long term nest egg. It is like we have faced these kind of situations in last decade and a half thrice and lo & behold.. we are still growing and doing something right..
Do not hesitate to continue to invest through Systematic Investment Plan ( SIP), if you already have or start new plan to take advantage of the situation as things are now available much cheaper now. In fact it is advisable to invest one time lump sum to take advantage of lower valuation currently available in the market. In terms of equity mutual funds route, always stick to the diversified mutual fund scheme or low cost Index equity fund.
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