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Real returns get better for retail investors

RBI's focus on controlling consumer inflation and raising of rates should see elevated levels of real returns

Clifford Alvares  |  Mumbai 

With long-term interest rates inching higher and trending lower, retail investors have finally begun to see an improvement in their real rates of return (the interest rate after adjustment for inflation).

Consumer price was at 9.52 per cent in August, whereas returns from corporate bonds, fixed maturity plans and debentures have been at 10.5-12.5 per cent in recent times. Real rates of returns have improved by 100-300 basis points (bps), depending on where one invests. A few months earlier, the interest rate on fixed income products was 8.5-9 per cent, while retail was higher than 9.5 per cent.


Says Dwijendra Srivastava, head, fixed income, Sundaram Mutual: “Given that retail is expected to come down and corporate returns are higher, a better real return is possible for the investor. Having said that, it depends on how actually turns out for investors.”

The real rate of return is now 250 bps-positive; in January, real rates were a negative 50-150 bps for retail investors.

Says Ajay Bagga, head, private wealth management, Deutsche Bank: “Investors are getting a positive real rate of return from fixed income investments in the past few months, as against negative returns last year, and that's a very good sign from the retail investors’ perspective."

As the Reserve Bank is expected to increase its focus on consumer price inflation, real interest rates could remain elevated in the coming months or, at least, positive for investors. In its new policy framework, has clearly targeted as the priority. It is likely to assign a higher weight to consumer price (CPI) as against only targeting the wholesale price index (WPI), say economists.

In a note, economist Sonal Verma of Nomura said the policy marked a regime shift in RBI’s operating framework. “It is clear that measures are becoming secondary, while is assigning a greater relative weight to and core inflation, as it believes that expectations are shaped by the latter. In particular, we believe that core has a greater probability of becoming the new medium-term nominal anchor,” she said.

Unlike most central banks, has been largely deciding its based on the was 9.52 per cent in August as compared to 9.64 per cent in July, while was 6.1 per cent in August against 5.79 per cent in July. measures for the retail consumer, while measures wholesale prices.

Experts say targeting the is the only way to attract more savers into the economy. There was a decline in the net financial savings of households to eight per cent of gross domestic product in 2011-12 from 11-12 per cent the previous year, estimates the Prime Minister's Economic Advisory Council.

Says Srivastava: “The new (RBI) governor is looking at improving the savings rate in the country and that to me is a positive sign.”

The governor had earlier said would issue new inflation-indexed bonds based on the CPI; this might happen as early as November. The previous issue of inflation-indexed bonds was based on the

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Real returns get better for retail investors

RBI's focus on controlling consumer inflation and raising of rates should see elevated levels of real returns

RBI's focus on controlling consumer inflation and raising of rates should see elevated levels of real returns
With long-term interest rates inching higher and trending lower, retail investors have finally begun to see an improvement in their real rates of return (the interest rate after adjustment for inflation).

Consumer price was at 9.52 per cent in August, whereas returns from corporate bonds, fixed maturity plans and debentures have been at 10.5-12.5 per cent in recent times. Real rates of returns have improved by 100-300 basis points (bps), depending on where one invests. A few months earlier, the interest rate on fixed income products was 8.5-9 per cent, while retail was higher than 9.5 per cent.

Says Dwijendra Srivastava, head, fixed income, Sundaram Mutual: “Given that retail is expected to come down and corporate returns are higher, a better real return is possible for the investor. Having said that, it depends on how actually turns out for investors.”

The real rate of return is now 250 bps-positive; in January, real rates were a negative 50-150 bps for retail investors.

Says Ajay Bagga, head, private wealth management, Deutsche Bank: “Investors are getting a positive real rate of return from fixed income investments in the past few months, as against negative returns last year, and that's a very good sign from the retail investors’ perspective."

As the Reserve Bank is expected to increase its focus on consumer price inflation, real interest rates could remain elevated in the coming months or, at least, positive for investors. In its new policy framework, has clearly targeted as the priority. It is likely to assign a higher weight to consumer price (CPI) as against only targeting the wholesale price index (WPI), say economists.

In a note, economist Sonal Verma of Nomura said the policy marked a regime shift in RBI’s operating framework. “It is clear that measures are becoming secondary, while is assigning a greater relative weight to and core inflation, as it believes that expectations are shaped by the latter. In particular, we believe that core has a greater probability of becoming the new medium-term nominal anchor,” she said.

Unlike most central banks, has been largely deciding its based on the was 9.52 per cent in August as compared to 9.64 per cent in July, while was 6.1 per cent in August against 5.79 per cent in July. measures for the retail consumer, while measures wholesale prices.

Experts say targeting the is the only way to attract more savers into the economy. There was a decline in the net financial savings of households to eight per cent of gross domestic product in 2011-12 from 11-12 per cent the previous year, estimates the Prime Minister's Economic Advisory Council.

Says Srivastava: “The new (RBI) governor is looking at improving the savings rate in the country and that to me is a positive sign.”

The governor had earlier said would issue new inflation-indexed bonds based on the CPI; this might happen as early as November. The previous issue of inflation-indexed bonds was based on the
image
Business Standard
177 22

Real returns get better for retail investors

RBI's focus on controlling consumer inflation and raising of rates should see elevated levels of real returns

With long-term interest rates inching higher and trending lower, retail investors have finally begun to see an improvement in their real rates of return (the interest rate after adjustment for inflation).

Consumer price was at 9.52 per cent in August, whereas returns from corporate bonds, fixed maturity plans and debentures have been at 10.5-12.5 per cent in recent times. Real rates of returns have improved by 100-300 basis points (bps), depending on where one invests. A few months earlier, the interest rate on fixed income products was 8.5-9 per cent, while retail was higher than 9.5 per cent.

Says Dwijendra Srivastava, head, fixed income, Sundaram Mutual: “Given that retail is expected to come down and corporate returns are higher, a better real return is possible for the investor. Having said that, it depends on how actually turns out for investors.”

The real rate of return is now 250 bps-positive; in January, real rates were a negative 50-150 bps for retail investors.

Says Ajay Bagga, head, private wealth management, Deutsche Bank: “Investors are getting a positive real rate of return from fixed income investments in the past few months, as against negative returns last year, and that's a very good sign from the retail investors’ perspective."

As the Reserve Bank is expected to increase its focus on consumer price inflation, real interest rates could remain elevated in the coming months or, at least, positive for investors. In its new policy framework, has clearly targeted as the priority. It is likely to assign a higher weight to consumer price (CPI) as against only targeting the wholesale price index (WPI), say economists.

In a note, economist Sonal Verma of Nomura said the policy marked a regime shift in RBI’s operating framework. “It is clear that measures are becoming secondary, while is assigning a greater relative weight to and core inflation, as it believes that expectations are shaped by the latter. In particular, we believe that core has a greater probability of becoming the new medium-term nominal anchor,” she said.

Unlike most central banks, has been largely deciding its based on the was 9.52 per cent in August as compared to 9.64 per cent in July, while was 6.1 per cent in August against 5.79 per cent in July. measures for the retail consumer, while measures wholesale prices.

Experts say targeting the is the only way to attract more savers into the economy. There was a decline in the net financial savings of households to eight per cent of gross domestic product in 2011-12 from 11-12 per cent the previous year, estimates the Prime Minister's Economic Advisory Council.

Says Srivastava: “The new (RBI) governor is looking at improving the savings rate in the country and that to me is a positive sign.”

The governor had earlier said would issue new inflation-indexed bonds based on the CPI; this might happen as early as November. The previous issue of inflation-indexed bonds was based on the

image
Business Standard
177 22