FMPs: Waiting for RBI’s decision in July

But remember a simple funda: Inflation is 11.89%. That is just the current figure - as we've seen, the past data has been dramatically adjusted upward later, nowadays literally every revision is 1% higher - so 11.89% could actually be 13%.

Given that, and given that inflation is increasing every week, we need to target returns of 15% or more. To fight inflation, RBI will need to tighten, meaning removing liquidity and increasing the cost of funds by raising interest rates. Even for the near future, the next RBI meet in July end will likely involve moves to tighten. Which then should increase yields going forward - meaning that compared to 11% today, in all likelihood, FMPs will be indicating 12% or more in August.

So wait till the RBI July meet before taking on a term commitment like an FMP.

For now I'd suggest short term liquid funds or debt funds. And in August if possible take up only FMPs for a 9 month tenure if possible (as rates are likely to increase further).

When we reach 16 to 17% yields I would find long term government bonds attractive. (or funds that hold them) A 10 year bond will attractive, not for long term investment, but because I expect interest rates to fall back below 10% within 10 years, and the falling yield will raise prices of these bonds dramatically in the interim.

Related posts:

1. How can FMPs save you tax? FMPs, or Fixed Maturity Plans are quite in vogue nowadays...
2. New NHAI bonds for Capital Gains Exemption Samarth Modi, who I've been having an email conversation with...
3. Bond Markets, Inflation, Policy Action And the Lag Effect This comes from two comments to my last post asking...
4. RBI Raises Rates – Why Are We Surprised? RBI raises rates in two phases - the repo rate,...

This entry was posted on Saturday, July 12th, 2008 at 7:23 AM and is filed under Commentary. You can subscribe to any comments to this entry via RSS 2.0. You can leave a response, or trackback from your own site.