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Rama Krishna Vadlamudi, HYDERABAD

14 August 2013
Dear Friend, After WPI (wholesale price index) inflation unexpectedly rose to 5.79% in Jul.2013 from 4.86% in Jun.2013, the bond markets fell sharply and the 10-year G-sec yield has closed at 8.50% on 14Aug2013. This indicates more than 100 basis points rise in 10-year G-sec yield in the last one month or so. The rise reflects: 1. Reserve Bank of India's liquidity tightening measures, undertaken after July 15th, purported to stem Indian rupee's fall against US dollar. 2. The inability of the Central/State Governments and RBI to control inflationary expectations and trends in the Indian economy. While manufacturing inflation is contained by vitiating investment climate in the country, the authorities (RBI as well as the Governments) have been unable to do anything meaningful in controlling food and fuel inflation. The self-made fiasco has been going on for the past four to five years under the Manmohan Singh leadership. 3. The realisation by the market participants that the authorities are not in a position to control either fiscal deficit (before 2014 General Elections) or current account deficit. 4. Complete failure of the management of external value of rupee, especially in the last six to nine months, on the part of RBI and the Central Government #.
(# Even as I was posting this article on my blog, news has broken out that the RBI has taken certain steps to control overseas direct investments and outward forex flows. My initial reaction to these measures is that these are regressive steps taken under panicky conditions.)

As you're aware, markets are integratedmeaning that what is happening to rupee is impacting bond as well as stock markets; and what is happening in bond markets is affecting both the rupee as well as the stock markets. To sum up, the stock, bond and currency markets are closely interlinked. The inter-dependence does not end in domestic markets. All the financial markets have been dancing to the tune of global developments,

Rama Krishna Vadlamudi, Hyderabad

14 August 2013

almost on a daily basis, particularly in the last one decade. You've seen how violently the Indian bond markets reacted after the US Fed in May/June 2013 hinted at tapering its quantitative easing or QE3 bond buying programme. My point is that we need to have an understanding of all these marketsboth domestic as well as globalto be able to exploit any mispricing of securities. I think Indian bond markets are poised to offer good investment opportunity for investors with a time horizon of two to three years. I think we're inching closer to getting better opportunities. Ordinary investors like us cannot time the markets. However, we can start investing in some good debt mutual funds, which have exposure to long term bonds. When interest rates start to fall, prices of long term bonds will rise much faster compared to short term bonds. Hence, you can consider exposure to some long term bond funds to exploit the opportunities thrown up in the market, depending on your risk appetite. If my memory is correct, the previous high of 10-year G-sec yield was around 9.55% in 2008. Investors who bought bonds at a yield level of 9.50% or 9.00% had reaped phenomenal returns in the next three months. If the 10-year yield rises to 9.25% or 9.50% in the next few weeks/months, it'll be an excellent opportunity for bond investors. But I doubt whether RBI will allow the 10-year G-Sec yield to rise to 9.50% or above. (RBI is the banker to the Central Government. RBI always takes care of the Government's interests. If bond yields rise, the interest cost for the Government goes up. So, RBI always tries to keep the yields lower in order to protect the government.) So, the safe option is to invest in long term bond mutual funds, when the 10-year G-sec yield reaches a range of 8.75% and 9.25%. If there is too much panic in bond markets, because of inflationary concerns or something to do with the rupee, then bond market may react feverishly creating excellent opportunity for bond investors with a time horizon of two to three years. Disclaimer: Please check with your competent financial adviser before making investments. This post is meant for information purposes only. You can select some gilt mutual funds by doing thorough research or after consulting your adviser. Sharing is Winning,

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