That India reaped a windfall from the recently concluded telecom auctions is now old hat. It is time for the repercussions to be felt. We mean positive of course. And the first positive fallout is already here. Fitch Ratings yesterday revised outlook on India's long term local currency to stable from negative. And it is the revenues from the telecom spectrum auctions that have made all the difference here. The ratings agency now predicts the public debt to GDP ratio to come in at 80% in FY11. This is a good 3% improvement from the levels envisaged earlier and has been attributed to buoyant one-off revenues from the 3G license and broadband spectrum auctions. What is more, the agency has also revised India's GDP growth projections for the current fiscal upwards to 8.5%.
Fitch has also sounded some words of caution. Especially on the long term deficit reduction plan. It continued to believe that India's track record in medium term fiscal deficit reduction is not very encouraging and this could put downward pressure on ratings if not looked into. It also remains concerned on the inflation front and adds that an intensified inflation shock would be negative for India's ratings.
Thus, while the improvement in India's ratings is indeed heartening, it should be noted that the biggest reason behind the improvement has a one-off feel to it and unless India undertakes large scale structural reforms, its ratings may quickly spiral downwards yet again.
You can lose money in bonds too
Sample this. Between 1985 and 2009, a period stretching as much as 25 years, returns in bond fund have fallen in only three years in the US! Indeed, with interest rates on a secular decline since the 1980s, people didn't have to rely too much on investment skills to make money in bonds. They just happened to be at the right place and at the right time.
But as per Moneynews, all that could change soon. With the US Federal Reserve unlikely to keep interest rates near zero for long and with the debt problem threatening to stoke inflationary fires, bond prices could well be headed downwards for quite some time to come. Thus, it could well turn out that the theory that has been in existence for almost a quarter of a century will be put to its sternest test yet. In other words, one could end up losing money in bonds as well.