08 October 2013

Analysts see another repo hike on Oct 29


LoansWelcoming RBI's liquidity infusing moves wherein it cut MSF by 0.50 per cent and introduced a term repo window, analysts today said this in no way reflects a shift in the stance and the market must expect a repo rate hike at the next policy review later this month.

"At the October 29 policy, we expect the RBI to cut the MSF (marginal standing facility) rate by a further 0.25 per cent, but hike the repo rate by 0.25 per cent to contain inflation expectations," brokerage firm Bank of America Merrill Lynch said in a note. 

Governor Raghuram Rajan's move to cut the MSF rate, at which banks borrow if they exceed their repo borrowing limits, by 0.50 per cent to 9 per cent should not be construed as a reversal in his policy stance and is more of a normalising measure, Citi said in a note. 

It expects a cut of up to 0.25 per cent more in the MSF rate and a hike of up to 0.50 per cent in the repo rate by December. 

"Further policy rate hikes are, therefore, in a sense a pre-condition for any further roll-back in the currency stabilisation measures to ensure that the monetary stance is appropriately calibrated to contain domestically and externally sourced inflation pressures," HSBC said. 

To defend the depreciating currency, the RBI had taken a series of unconventional measures mid-July, including limiting the banks' borrowing under the repo window to 0.50 per cent of their liabilities and increasing the MSF rate by 3 percentage points to take the difference between the repo rate. 

The measures did not have the desired impact on the currency, but pushed up rates in the system. 

At his first policy review on September 20, Rajan cut the MSF by 0.75 per cent and increased the repo rate by 0.25 per cent to anchor inflationary pressures. 

The gap between the repo and the MSF rates reduced to 2 per cent as a result of the moves and further narrowed to 1.50 per cent, following Monday's cut.

Without specifying which of the two rates will do more walking, Rajan had said he wanted to narrow the gap between the repo and the MSF to the normal one percentage point.

"Going forward, we expect that the RBI will further roll back the currency stabilisation measures, but also raise the repo rate to anchor inflation expectations. 

“More liquidity measures are also expected," HSBC said in a note. 

It added with the rupee stabilising in the 61-62 levels since September, the RBI is more comfortable about the currency, but concerned over the liquidity conditions. 

The RBI also said it would be injecting additional liquidity through 7 and 14 day term repos. 

"RBI's Monday action reflects the stability of the rupee around 61-62 to the US dollar and increased demand for liquidity as people withdraw cash from the banking system during the festival season," India Ratings said in a note. 

Some analysts also point to the onset of the busy second half of the fiscal which generally witnesses a higher credit pick-up as a factor which RBI would have considered. 

India Ratings said the move is positive for the banks, as it will help them widen the net interest margin, which had come under pressure following hardening of rates. 

Bank of America Merrill Lynch said yesterday's measure are positive for banks, especially the smaller ones with lower percentage of low-cost current and saving account deposits.

Shriram Transport Finance NCD: Offers competitive returns:: Business Line

Rates on this NCD are not matched by bank FDs, NBFC or company deposits currently.
If you are looking for good investment options among fixed income instruments, a portion of your money can be parked in the latest secured non-convertible debenture issue from Shriram Transport Finance. For time periods of 36, 60 and 84 months (i.e., 3,5, and 7 years), the company is offering an interest rate of 11.25, 11.5 and 11.75 per cent respectively for individual investors. These rates are matched neither by bank fixed deposits nor NBFC/company deposits at the moment.

HOW IT COMPARES

The rates offered appear quite competitive on a few parameters. For one, it takes into account the upward move in the yield on 10-year gilt securities since the company’s first NCD offer in mid-July. Compared to its earlier issue, rates are higher by about 35 basis points. In this period, 10-year gilt yields have approximately moved up by a percentage point to 8.6 per cent now.
Secondly, rates are higher than what bank, company and NBFC deposits are offering currently. Bank deposits of 3 to 5 years offer only about 9-9.5 per cent interest rates. Among non-banks, Shriram Transport itself offers 10.75 per cent on its deposits (rated AA +) on three and five-year terms. For a higher AAA credit rating, M&M Financial offers slightly lower rates than Shriram Transport.
However, rates on the NCD are lower than recent issues such as those from SREI Infrastructure Finance, Muthoot Finance and IIFL. But this must be seen in the light of their credit ratings. Shriram Transport’s issue has been rated AA\Stable by CRISIL, while all the others have been rated at least a notch lower by various agencies.

THREE-YEAR OPTION IDEAL

Investors can choose the three-year option offering 11.25 per cent returns. In the 10-, 20- and 30-per cent tax brackets, the post-tax returns work out to 10.1, 8.9 and 7.8 per cent respectively.
Choose the non-cumulative option if you need regular income flows. Interest here is paid out annually. Interest on the non-cumulative option is compounded annually and paid out on maturity along with the principal.
Those with a slightly higher risk appetite can go for the five-year option. The stringent asset classification norms by RBI may impact the provisioning cost for the company. Currently, the loans for which instalments are overdue for 180 days or more are classified as non-performing. The proposal is to bring it down to 90 days (by end of 2014-15) for NBFCs in a phased manner. If these recommendations are accepted, the company may see higher delinquencies and hence higher provisioning costs.

TAX-FREE BONDS OR NCD

If you have a perspective of more than five years, tax-free bonds that are flooding the market now may be a better choice, especially if you are in the highest tax bracket of 30 per cent. The one from IIFCL, which is currently open, offers 8.26 per cent on 10-year bonds. Post-tax returns on the seven-year option from Shriram Transport will be marginally lower than this for someone in the 30 per cent tax bracket.

ISSUE DETAILS

The offer opens on October 7 and will be on till October 21. The minimum application amount is Rs 10,000. Investors are eligible to receive NCDs in physical mode if they choose to. The issue will be listed in the NSE and BSE. A downward movement in interest rates could lead to an appreciation in the value of the NCD.

How to get back on track after a financial setback



Whether it is your financial misstep or a financial disaster that lead to a financial setback, there are ways to get back on track.
Have you come across an incident in your life, that has set you back by a couple of years financially?
Ravi was diligently planning towards his future goals by investing in mutual funds using systematic investment plans. He had managed to accumulate an amount of Rs 5 lakh in mutual funds over three years. Through his employer, he had covered his family including parents with a medical insurance of Rs 5 lakh for each member. It was all well until Ravi’s mother was detected with cancer. Her treatment cost Ravi Rs 12 lakh and at the end of it all, he lost his mother.
Ravi was crestfallen. He had lost his dearest family member and as if that wasn't enough, his savings over the last three years were wiped off and he had to take an additional personal loan to cover the medical treatment.
In the above example, it would be harsh to say that Ravi was unprepared. On the other hand, he had done all the right things and yet, the financial setback was out of his control. There also may be cases where people land up in a financial mess due to their own mistakes. Uncontrolled spending leading to a debt trap is quite common today. So, irrespective of whether it is your financial misstep or a financial disaster that lead to a financial setback, there are ways to get back on track.
Let us look at some ways to get your financial life back on track after a financial setback.
The author Aditya Prasad is chief evangelist at Perfios