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Income, gilt funds bear brunt of rate hike - Views on News from Equitymaster
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  • Jul 25, 2000

    Income, gilt funds bear brunt of rate hike

    The Reserve Bank of India’s (RBI) move to hike the bank rate by 1%, the cash reserve ratio (CRR) by 0.5% and reduce all refinance limits of banks by 50% (wef July 21, 2000) has taken its toll on fixed income securities. Income and gilt funds have seen some NAV erosion subsequent to this announcement.

    Open-ended, Gilt Schemes NAV
    Birla Gilt Plus (LT) (Gr) 11.0 -1.00% 0.30% 0.00% 12.90%
    K Gilt Investment (Gr) 12.0 -1.00% 0.00% 11.90% 12.10%
    DSP ML G-Sec. Fund A(Gr) 11.0 -1.10% -0.40% 0.00% 12.60%
    Alliance Govt.Sec.(ST)(Gr) 1072.3 -1.10% -0.30% 0.00% 9.80%
    Birla Gilt Plus Liquid (Gr) 10.9 -1.20% -0.50% 0.00% 11.70%
    Dundee Sov. Trust (Gr) 9.9 -1.40% -0.50% 0.00% 10.40%
    Templeton Govt Sec (Gr) 11.6 -1.40% -0.40% 14.40% 14.30%
    Birla Gilt Plus Inv. (Gr) 10.8 -1.50% -0.40% 0.00% 9.90%
    Templeton Govt Sec (Div) 10.3 -1.50% -0.40% 12.10% 12.20%
    Tata Gilt Sec. B (App) 11.3 -1.50% -0.30% 0.00% 15.20%
    K Gilt Serial 2007 (Gr) 10.9 -1.80% -0.20% 0.00% 13.20%
    Alliance Govt.Sec.(LT)(Gr) 1069.1 -2.00% -0.80% 0.00% 10.10%

    Will the rate hike be effective for long? Most economists don’t think so. They see this move as being largely temporary in nature. A statement from Kotak Mahindra Mutual Fund had this to say, ‘The measures should be seen only as temporary. Mr. Jalan in the credit policy review had stated that though the objective of the monetary policy was to bring down CRR and interest rates, the RBI could use the various tools at its command temporarily for correcting any aberrations or speculative pressures in the system.’

    The move to raise the CRR and refinance was largely to tighten the liquidity in the system. To quote Kotak Mahindra’s statement, ‘…(the rate hike) is in no way an indicator of a policy shift towards higher interest rates in the long term.’ It further adds, ‘the worry that the interest rates are shifting upwards is unfounded. In all likelihood, the measures will be reversed by the time of the next credit policy announcement.’

    The main reason why most economists believe that the rate hike is temporary in nature is because the government has yet to complete 60% of its borrowing programme, and a high interest scenario will not suit its interests. Other issues like inflation, currency depreciation, revenue collections, forex reserves aren’t really a matter of concern to warrant high interest rate regime.

    The NAV erosion in gilt funds should be viewed against this backdrop. For investors wishing to enter gilt funds, this is a good opportunity.



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