Floaters spell stability for India Inc

India Inc has found a safe place to park its surplus funds with the interest rate volatility subsiding.

Subscriptions to the 30-odd long-term floating rate debt schemes of mutual funds went up from an average 4 per cent to around 25 per cent in May, after the Reserve Bank of India imposed restrictions on the hedging pattern of corporate funds.

The trend was pretty much the same in June too, fund managers say. The annualised returns on these funds vary between 4.80 per cent and 5.95 per cent. These long-term floaters are being used by liquidity-flush corporates like Wipro and Infosys.

The rate scenario may be uncertain for banks and hedge funds betting on a rate hike but corporates believe that the interest rate will stabilise in medium- to long-term funds.

The funds usually invest in long-term government securities, currently available at rock bottom prices. Dealers say since the bond market is just recovering from a bearish phase, prices have started looking up.

If a paper is picked up at a low price now, there is a good scope for it to appreciate later as the interest rate is poised to stabilise at current levels.

In the bond market, prices and interest rates move in reverse direction.

According to Mahindra Jajoo of ABN Amro Mutual Fund, there was uncertainty in interest rates outlook in the last two-three months.

"However, the RBI has hinted that economic conditions do not warrant a rate review. I personally feel that it is good time to divert money into long-term funds because of the stability on interest rate scenario," he says.

The European Union and the UK are poised for a downward rate revision as there is a global slowdown in economic recovery. Despite the recent upward movement in global oil prices, fund managers feel that the prices will stabilise at these levels.

The wholesale price index based inflation rate too was expected to come down, fund managers say, explaining the benign outlook on the interest rates.

SBI Funds Management managing director PGR Prasad says: "There is huge expectation on the long-term rates coming down because of high liquidity. The fact that inflation is also at a lower rate has added to this trend."

Corporates are flush with surplus funds as they are increasingly accessing the overseas market for funds. As the maturity of the funds used to extend well above one year, these corporates used to bring in the funds and undertake trading activities through implied forward rates and other such derivative products.

They cannot do this any more as the RBI has made it clear that MIFOR could not be used as a benchmark until and unless an entity has a genuine exposure for a certain maturity.