There was a time in India when Interest rates in India were as high as 18%. The common public was happy with investing in bank FDs and making 18% interest. That was the reason businesses were receiving loans at high levels and equity capital was difficult. That was the time when RBI came up with UTi and the first Mutual fund scheme unit 64 came up.
Today when I was going through Twitter, I received some videos that Canara bank employees going through the market and making mouth publicity about high-interest rates and so expecting people to invest in FD. That shows the transition from FD to equity. As a finance guy who learn bits and parts of finance since 2012, I saw it and partly was part of all of this.
The reason why I am writing this today is that I was going to the bank for making Fds with my mother. Even I was making some on my name on the SBI YONO app. Everywhere I realized that Interest rates are high and some banks are giving a little higher interest on one-year maturity. It nearly looks like inversion if I made plotted graph of some of them. and that is not at all shocking to me. The way RBI and some other central banks are increasing interest rates and inflation was increasing, and this was a distant possibility that manifested. But why on the earth, I am going bullish on Fds which are most hated by many financial analysts?
it is no secret. it was bound to happen.
Many different forces are working at this moment in the field of global finance. It was impossible to even think one year back that interest rates will be this high. in one of my post Investment decision in 2022: Really what are risks? I talked about many risks. For the first few days, it was what I said, But the way war and logistical risk were absent from my analysis, It wasn’t a shock for me that I saw interest rates increasing. Oil prices were supposed to group as the war had Russia as one party.
Another factor that was working is Long term heavy marketing from Mutual funds. all of them made such good marketing that the common public felt that SIP is a way of investing and start thinking of SIP as one asset class. Whatever happened was good for the first few months as in the early days it was not big as incremental flows went from FDs to SIP and mutual funds. But everyone has forgotten that to make the same companies work, they need debt capital and for that, Deposits are needed. Flows in Mutual funds reduced return against risk and made banks’ deposits a little bit better.
That is what happening.
While writing all this, I believe one thing I need to clarify. Franklin Templeton is not something Bank FD investors need to think about. What went wrong in the Franklin Templeton fund is credit risk funds and short-term funds and ultra short-term funds received big redemption requests. For banks, it’s not a big issue as the bank is regulated and needed to keep funds with RBI. But another side of the rising interest rates is more important and I am sure you came here for that.
$30 billion opportunity for India was waiting. The reason was the inclusion of Indian bonds in the JP morgan & chase Global bond index ( Emerging market). It happened even after the fact that the Indian government bond market is the biggest emerging debt market with a $1 trillion size. GBI EM (Global Bond index emerging market was launched in 2005 as the first comprehensive global local emerging market index. it tracks local currency bonds issued by emerging market governments. here also saw a play about the Ukraine war. In 2021 October, JP morgan said India need to improve market access, trading, and settlement to achieve index inclusion. But Russia’s exclusion from the same made many others heavyweight. like 10%+ like china Indonesia, Thailand, Malaysia, Brazil, Mexico, and South Africa. Some back of envelope calculation shows that a $30 billion inflow was expected to come to India. The clearing corporation of India which settle government bond market transactions shows as of 8 October, only $10 billion were held by foreign investors. People gave many reasons. One big highlight was taxation. like if I sold a bond in less than one year, I am supposed to pay 30% plus foreign investors need to pay a 5% withholding tax on interest.
the settlement was another. India wants this onshore settlement and not offshore like Euroclear. Euroclear was founded in 1968 to settle trades on the then-developing Eurobond market. it specializes in the settlement of securities transactions as well as safekeeping and asset servicing of them. since 2021 June, RBI takes many steps. From removing the limit for foreign investors of buying bonds. It changes many norms and relaxes some rules. RBI in fact allowed banks to lend for margin requirements. But nothing happened.
So now what?
As credit offtake is increasing, and asset quality is looking better and better, the issues in Indian banking looking solved like Yes Bank and all. I think its time for at least one year of FDs.
All over the world, Every Central Bank is increasing Rates, Inflation is increasing and in some countries breaking records. It is not the senario where equity will perform. In my view only companies which didn’t have debt or Minimal debt and know how to manage it will survive.
Many well known investors mentioned that interest rates are more like Gravity for equity. So when this gravity is increasing, it’s difficult for some compani to see their earnings going high. In my personal experience, I saw Axis Bank, State Bank of India and one small Bank near my town increasing Rates. I am sure the picture is same all over the world.
