Posts Tagged ‘Bonds’

EQUITY MARKET OVERVIEW JANUARY 2010

EQUITY MARKET OVERVIEW JANUARY 2010

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The year 2009 was an unconventional year with surprises galore.

The sharp recovery in the benchmark Sensex is evident of the same.

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The year came with some shocks and some surprises, be it Satyam opening the Pandora’s Box, government coming to the rescue through fiscal stimulus or gold touching the new highs.


With appreciation of more than 75%, 2009 calendar year emerged as the best year bringing back hope and strengthening the faith and confidence of investors.

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As we welcome the New Year, let’s have a glance at how was the sunset of 2009 with the happenings in the month of December.


The month started with not much action as the indices were little changed as every rise was seen as an opportunity to book profits as fear of rising inflation barred investors from building large positions.

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The India’s industrial output jumped 11.7% in November 2009 from a year earlier, helped by stimulus measures and robust domestic demand.


The momentum in the country’s industrial output is likely to sustain in the coming months.


The facility for Indian companies to buy back their Foreign Currency Convertible Bonds (FCCBs) under the automatic route and approval route would be discontinued from January 2010 due to the improvement in the equity market.

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The central bank said it would allow non-bank financial companies which are focused on financing infrastructure projects to borrow from overseas markets under the approval route.


During the middle of the month, profit taking pulled the key benchmark indices lower.

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The worst monsoon since 1972 and flood in some parts of the country have pushed up food prices nearly to 17.28% annually in beginning of January, while the headline inflation accelerated to 7.31% in December.


The food supplies need to be boosted to stem the price rise as the current acceleration in inflation rate is not only due to loose monetary stance.


The government towards this, has cut the open sale price of wheat, while ministers have pledged to import food items that are in short supply to boost local supplies and stem inflation.

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Dollar also showed strength and sparked fears of unwinding of dollar carry trade.

The Christmas week saw a ‘Santa Claus’ rally that took the market to 19 months’ closing high in a truncated trading week.

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Further, the latest data showed that corporate advance tax payments for the October-December 2009 quarter shot up sharply, suggesting a higher profit growth in corporate sector in the third quarter (October-December) of the current fiscal.

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The corporate advance tax payments for the quarter were up 44% to Rs.48300 crore against a 3.7% decline in April-June quarter and a 14.7% increase in July-September quarter.


The company-wise break-up of advance tax collection suggests a broad-based recovery with automobiles, cement, metals and consumer goods, doing well.

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Amidst all this, we had the Finance Minister‘s statement that containing inflation and cutting fiscal deficit are the major challenges for the government in the short-to-medium term.


Towards this the government can even alter the proposed draft for the direct tax code to sustain the high economic growth.

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RBI, Monetary Projections And Indian Economy

Hello Friends,

Just an extension of our previous blog ”RBI And Its Policies – Part 1β€³.

RBI, Monetary Projections And Indian Economy

RBI, Monetary Projections And Indian Economy

In this Blog we would touch upon the aspects as that of Monetary projection from RBI, assessment of economy scenario at present and relevance of RBI policy on economy.

Monetary projection:

For policy purposes, money supply (M3) growth for 2009-10 is placed at 17.0 per cent, down from 18.0 per cent projected in the Annual Policy Statement.

Consistent with this, aggregate deposits of scheduled commercial banks are projected to grow by 18.0 per cent.

The growth in adjusted nonfood credit, including investment in bonds/debentures/shares of public sector undertakings and private corporate sector and Commercial Papers (CPs), has been revised downwards at 18.0 per cent as in the Annual Policy Statement.

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Economy:

Since the last review in July 2009, there has been a discernable improvement in the global economy.

The recovery is underpinned by output expansion in emerging market economies, particularly in Asia.

World output has improved in the second quarter, manufacturing activity has picked up, trade is recovering, financial market conditions are improving, and risk appetite is returning.

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A sharp recovery in equity markets has enabled banks to raise capital to repair their balance sheets.

If we talk about the home country then there are definitive indications of the economy attaining the ‘escape velocity‘ and reverting to the growth track.

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The performance of the industrial sector has improved markedly in recent months.

Domestic and external financing conditions are on the upturn.

Capital inflows have revived.

Moreover activity in the primary capital market has picked up and funding from non-bank domestic sources has eased.

Liquidity conditions have remained easy and interest rates have softened in the money and credit markets.

Growth projection for GDP for 2009-10 on current assessment is placed at 6.0% with an upward bias, the same as the previous policy review.

But some darker parts also persist.

There are clear signs of rising inflation stemming largely from the supply side, particularly from food prices.

Private consumption demand is yet to pick up.

Agricultural production is expected to decline.

Services sector growth remains below trend.

Bank credit growth continues to be sluggish.

The central bank has warned of possible asset price bubbles, raised banks’ provisioning requirements for commercial real estate loans and lifted inflation forecast.

WPI inflation for end-March 2010 is projected at 6.5 per cent with an upward bias.

This is once again higher than the projection of 5.0 per cent made in the Annual Policy Statement in July 2009.

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Stay Tuned for more on the topic.

We would look into Monetary Policy stance, more facts about economic indicators and Analysis from the Analyst from monetary point of view.

Note : For More Finance Gyan, Latest Industry, Stock Market, Economy News and Updates, please click here

Bear and Bull – Part 1

Hello Friends here we come up with our another write up on β€œSMC Gyan Series” πŸ™‚

Have you all ever wondered that what exactly this Bull and Bear Market is ?

 

Bull markets and bear markets...what are they?

Bull markets and bear markets...what are they?

What are they? What do they look like? What’s the origin of this terminologies?

Lets Talk about it

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When we talk about bull and bear stock markets it reminds us that it’s a zoo out there. And, like any zoo, there are quite a few wild species to be found πŸ˜‰

The first two are the bulls and the bears.

Bull market is when stock prices are climbing strongly and a Bear market is when they’re languishing.

Bear Market

To be more precisely, in finance, a bear market is a market condition that occurs when the prices of shares decline or are about to decline.

Figures may vary, but if prices decrease by 15 to 20% then the market is assumed as a bear market.

In general, a bear market resumes if the government goes into recession and if the inflation rate is high.

Bull Market

A bull market is a condition of a financial market of a group of securities in which prices are rising or are expected to rise.

The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue.

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Myth About Bull and Bear Markets

One common myth is that the terms “bull market” and “bear market” are derived from the way those animals attack a foe, because bears attack by swiping their paws downward and bulls toss their horns upward.

This is a useful mnemonic, but is not the true origin of the terms.

Long ago, “bear skin jobbers” were known for selling bear skins that they did not own; i.e., the bears had not yet been caught.

This was the original source of the term “bear”.

This term eventually was used to describe short sellers, speculators who sold shares that they did not own, bought after a price drop, and then delivered the shares.

Because bull and bear baiting were once popular sports, “bulls” was understood as the opposite of “bears.” I.e., the bulls were those people who bought in the expectation that a stock price would rise, not fall.

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Stay Tuned for more on this where we would touch upon if bull and bear markets are inevitable and what are the basics investors should keep in mind while trading in bear and bull market.

Sensex to Seek Direction from RBI’s Monetary Policy Review

Sensex to Seek Direction from RBI's Monetary Policy Review

Sensex to Seek Direction from RBI's Monetary Policy Review

Dalal Street will closely track the Reserve Bank‘s monetary policy review this week to seek direction, as weak global and domestic cues may continue to dampen sentiments in opening trade on Monday, experts say.

Besides, the expiry of the futures and option contracts this week is expected to keep the market volatile.

With global markets deteriorating and shares of Reliance Industries acting as a drag, market may open weak on Monday.

Marketmen said as valuations are overstretched, investors are now booking profit even at the slightest bad news.

Also, liquidity crunch is keeping frontline stocks under pressure.

On Friday, RIL scrips declined by 4.5 per cent.

β€œRIL, which is already reeling under uncertainty over the ongoing court case, would face further pressure. The scrip would be a dampener on the already weak market sentiment,” SMC Global Vice President Rajesh Jain said.

The Bombay Stock Exchange barometer Sensex lost three per cent, its biggest weekly fall in 11 weeks, to 16,810.81 points.

The index is up over 74 per cent so far in 2009, aided by foreign fund flows of over $14 billion.

India Inc Raises Rs.40K cr in Debt Market in Q1 :)

Indian-inc-raises-40k crores

Improved investment sentiments have led corporate India‘s fund raising plans to sky high level.

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With more than half of the fund being mobilized by financial institutions, India Inc’s fund raising through private placement of debt has touched Rs 40,300 crore in the Q1 of the current fiscal.

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This is an increase of huge 42% from first quarter of last financial year.

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However, the April-June quarter of the present financial year saw a mobilization through debt (bonds) on private placement basis of Rs 40,300 crore, staggering 42% up from Rs 28,385 crores, raised in the first quarter of last financial year.

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Moreover, the largest mobilization through the route came in from financial institutions and banks with more than 67 institutions and corporate houses raising the full amount during the June quarter.

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Private placement of Debt is issue of securities, usually bonds that are sold without an initial public offering to a small number of private investors.

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Further, fund raising of financial institutions through debt private placement increased 35% to Rs 21,002 crore in the June quarter.

Additionally, private sector beat public sector in terms of fund raising where its mobilization increased by 50% from Rs 11,184 crore to Rs 16,753 crore.

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On the other hand, public sector financial institutions combined together, saw a decline in fund raising activity, whose mobilization stands 58% of the total amount, slipping 61% that mobilized in the previous year.

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Let’s Talk About Mutual Funds ;)

mutual-funds-basics

Friends we will discuss now as to what are mutual funds before going on to seeing why to invest in mutual funds instead of stock πŸ™‚

What is a Mutual Fund?

A mutual fund is an investment that pools money from many investors, and that money is used to invest in stocks, bonds and other securities.

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One mutual fund share includes a portion of a share of each stock held in the fund’s portfolio.

The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value.

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Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.

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Who Decides What a Mutual Fund Invests In?

Mutual fund managers decide what securities to buy or sell guided by the mutual fund’s objectives.

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If a mutual fund’s objective is to invest in the energy sector, the manager cannot buy shares in technology stocks.

Fund objectives let you know what to expect now and in the future.

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern.

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An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund.

Closed end funds have limited number of shares.

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Why Invest in Mutual Funds Instead of Stock?

You can invest in both mutual funds and individual stocks, but mutual funds are particularly useful in some cases.

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*Diversification: If you do not have a lot of money to invest, creating your own diversified portfolio to spread risk will be difficult.

Diversification is automatic in mutual funds.

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*Time : Successful investors take hours every week to analyze their holdings, stock market conditions and to educate themselves further on investing.

Mutual funds are a wise choice for those who lack the time to follow stocks so closely.

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* Experience: Consistently investing well takes a few years of experience and learning from mistakes and successes.
If you are not experienced with trading stocks but want returns over and above what a savings account offers, investing in mutual funds is a good way to grow your personal assets.

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Stay Tuned for for more Finance Gyan and to have more updates on Industry,Stock Market and Economy, Click Here

Investor’s Dilemma : Are ULIPs just another Mutual Fund??

ulips

At almost every investor mind a question is generally cropped up: β€œWhat is the difference between a ULIP and a Mutual Fund?”

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The reason, perhaps for the wide extent of confusion, lies largely in the way ULIPs have been sold by agents. As just another mutual fund.

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Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning.

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As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

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Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few.

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Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.

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Mutual Fund is a body corporate that pools the money from individual/corporate investors and invests the same on behalf of the investors /unit holders, in various investment avenues like equity shares, Government securities, Bonds, Call money markets etc., as per the pre-specified objective and distributes the profits earned from such investment.

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In India, Mutual Funds are registered with the Securities and Exchange Board of India (SEBI).


ULIPs vs Mutual Funds

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ULIPs are a mix of investment and insurance. πŸ™‚

But very long term investment, not even medium term.

Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

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Charge structure in a ULIP is vastly different from a mutual fund.

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ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

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In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India.

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Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

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ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge.

So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

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So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs. πŸ™‚

So identify your needs with a financial planner and then pick the product suitable for you.

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ULIPs are a mix of investment and insurance. But very long term investment, not even medium term.

Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

Charge structure in a ULIP is vastly different from a mutual fund.

ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge. So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs.

So identify your needs with a financial planner and then pick the product suitable for you.

Factors that Move the Interest Rates – Part 2 (MONETARY POLICY)

Monetary Policy

In previous Blog we have discussed about the major factors responsible for the change in interest rates and price of bonds indirectly.

All those three factors like Inflation, Currency and Liquidity have been touched upon in last blog.

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Now time to look into another major factor which causesΒ  movement in the interest rate. The factor i am talking about is Monetary Policy. πŸ™‚

Monetary Policy: The RBI controls liquidity largely through monetary policy instruments –

(i) CRR & SLR – CRR (Cash Reserve Ratio) refers to a portion of deposits (as cash) which banks have to maintain with the RBI.

Banks are also required to invest a portion of their deposits in government securities as a part of their SLR (Statutory Liquidity Ratio) requirements.

If either of these is increased, liquidity tightens and so interest rates harden (increase).:(

Recently, RBI has reduced both these rates to infuse liquidity in the system – CRR is 5% (down 250 bps from March ’08) and SLR is 24% (down 100 bps).

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(ii) Reverse repo rate – it is the overnight interest rate that a bank earns for lending money to the RBI in exchange for G-Secs.

A hike in reverse repo rate increases interest rates. Currently, reverse repo rate stands at 3.25%.

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(iii) Repo rate – it is the discount rate at which a central bank repurchases government securities from the commercial banks.

To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash).

To contract the money supply, it increases the repo rates. The current repo rate is 4.75%.

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(iv) OMO and MSS – OMOs (Open Market Operations) are outright transactions in government securities.

When the RBI buys G-Secs, it is injecting money into the system, hence, increasing liquidity, which softens (reduces) interest rates.

When the RBI sells G-Secs, it sucks out excess money from the system i.e. reduces liquidity in the system which hardens interest rates.

MSS (Market Stabilisation Scheme) is the issuance of treasury bills and dated securities by way of auction by the RBI.

This affects interest rates in the same manner as OMOs.

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Having collected updates on where the above parameters stand, one can have a better understanding of why interest rates are at their current levels, as well as which direction they are expected to move in.

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If most of them indicate that a rise in interest rates is expected, bond prices are likely to fall in the future.

On the contrary, an expectation of a fall in interest rates means bond prices will rise.

A word of caution here though – timing interest rate changes is difficult. This is because there is a low likelihood of being able to precisely predict the movement in the factors discussed above.

So in order to minimize interest rate risk, one should ensure that the bond portfolio is diversified across various maturities.

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4 Monetary Policy: The RBI controls liquidity largely through monetary policy instruments –

(i) CRR & SLR – CRR (Cash Reserve Ratio) refers to a portion of deposits (as cash) which banks have to maintain with the RBI. Banks are also required to invest a portion of their deposits in government securities as a part of their SLR (Statutory Liquidity Ratio) requirements. If either of these is increased, liquidity tightens and so interest rates harden (increase). Recently, RBI has reduced both these rates to infuse liquidity in the system – CRR is 5% (down 250 bps from March ’08) and SLR is 24% (down 100 bps).

(ii) Reverse repo rate – it is the overnight interest rate that a bank earns for lending money to the RBI in exchange for G-Secs. A hike in reverse repo rate increases interest rates. Currently, reverse repo rate stands at 3.25%.

(iii) Repo rate – it is the discount rate at which a central bank repurchases government securities from the commercial banks. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash).

To contract the money supply, it increases the repo rates. The current repo rate is 4.75%.

(iv) OMO and MSS – OMOs (Open Market Operations) are outright transactions in government securities. When the RBI buys G-Secs, it is injecting money into the system, hence, increasing liquidity, which softens (reduces) interest rates. When the RBI sells G-Secs, it sucks out excess money from the system i.e. reduces liquidity in the system which hardens interest rates. MSS (Market Stabilisation Scheme) is the issuance of treasury bills and dated securities by way of auction by the RBI. This affects interest rates in the same manner as OMOs.

Having collected updates on where the above parameters stand, one can have a better understanding of why interest rates are at their current levels, as well as which direction they are expected to move in. If most of them indicate that a rise in interest rates is expected, bond prices are likely to fall in the future. On the contrary, an expectation of a fall in interest rates means bond prices will rise. A word of caution here though – timing interest rate changes is difficult. This is because there is a low likelihood of being able to precisely predict the movement in the factors discussed above. So in order to minimize interest rate risk, one should ensure that the bond portfolio is diversified across various maturities.

Factors that Move the Interest Rates – Part 1:)

Interest rates

In earlier blog we have discussed about how Bonds are different than equities and why are they considered less risky instruments. πŸ™‚

Now coming on to this blog, we would talk about the 3 major factors (other than monetary policy) which moves the interest ratesΒ  and ultimately causes a price change in the Bonds.

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To determine where the interest rates are headed, it is important to have an understanding of the factors that move the interest rates.

This will in turn help gauge which direction bond prices are going to take, and one can make appropriate adjustments to a bond portfolio in order to maximize gains or minimize losses.

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1. Inflation:

Interest rates are directly related to inflation i.e. if inflation rises, so do interest rates.

This is because lenders demand higher interest rates to compensate for the decrease in purchasing power of the money they will be repaid in the future.

This causes bond prices to fall, since bond prices are inversely related to interest rates.

Inflation itself is affected by the economy’s currency and liquidity position.

In India, inflation is measured by WPI (Wholesale Price Index), for which is released every week.

For the week ended July 25, 2009, WPI was at (-) 1.58%. This may lead one to assume that inflation has gone down, but the reason for this low figure is a high base effect from 2008, when WPI showed doubledigit growth.

Current CPI (Consumer Price Inflation) figures are in the range of 8.6-11.5% for May-June 2009.

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2. Currency: A weaker rupee causes rising inflation, which in turn results in a rise in interest rates.

This is because one’s purchasing power reduces – if one was paying $60 or Rs.2400 (Rs.40=$1) to buy 1 barrel of crude oil, a weaker rupee (Rs.45=$1) means the same 1 barrel will now cost Rs.2700 i.e. Rs.300 more.

Similarly, a stronger rupee increases one’s purchasing power and brings down inflation, causing interest rates to fall.

The latter scenario is seen as a positive for the bond market, since it leads to rising bond prices.

Since 2008, the rupee has weakened significantly to Rs.47- 48 in July-August ’09.

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3. Liquidity: Interest rates are directly related to liquidity.

A crunch in liquidity means money is not readily available, since people are not willing to part with their cash.

A lower interest rate is then offered, which increases the price of already existing bonds in the market. The vice-versa also holds true.

One way of measuring the liquidity present in the system is to check the money supply measure – M3.

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There is another factor which is responsible for the movement in interest rates that is Monetray Policy which we would discuss in next blog

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To determine where the interest rates are headed, it is important to have an understanding of the factors that move the interest rates. This will in turn help gauge which direction bond prices are going to take, and one can make appropriate adjustments to a bond portfolio in order to maximize gains or minimize losses.