Tata Motors takes retail debt route for raising funds

Tata Motors has been trying to raise funds by offering debt securities to retail investors. The public offering of debt securities if successful will reduce some liquidity problems which the company is facing because of the Jaguar Land Rover.

Tata Motors has appointed Tata Securities, Kotak Securities, and JM Financial as the authorised brokers for this offer know as "Tata Motors Fixed Deposit Scheme". A retail investor will require to deposit a minimum amount of Rs 20,000 (and thereby in multiples of Rs 10,000) to participate in the scheme. The deposits for 1 year carry an interest rate of 10% p.a. For 2 years the interest rate is 10.50% p.a. and for 3 years it is 11.00% p.a. The income tax will be deducted at source from the amount of interest payable to the depositor in accordance with the provisions of the Income Tax Act, 1961 if it exceeds Rs.5,000 in a financial year.

Tata Motors has long term credit rating of AA+ and AAA for its debt instruments. It has made profits after tax of over 2000 crores in FY08.

	(Rs. in crores)
Year	Profit before tax	Profit after tax
2007-08	2,576	2,029
2006-07	2,573	1,913
2005-06	2,053	1,529

Moreover, its leverage ratio is also not high. However, its debt/equity ratio has increased from 0.44 in FY04 to 0.7 in FY08. Still, Tata Motors has enough profits to easily service its debt. Its interest coverage ratio was 7.0 in FY08.

Balance Sheet (Rs. in crores)
	As at	As at
Liabilities	31.03.08	31.03.07
Share Capital	386	385
Reserves & Surplus	7,454	6,484
Secured Loans	2,462	2,022
Unsecured Loans	3,819	1,987
Deferred Tax Liabilities	976	787
Current Liabilities
& Provision	10,657	7,728
Total	25,752	19,394

	As at	As at
Assets	31.03.08	31.03.07
Fixed Assets and
intangible Assets (Net)	10452	6395
Investments	4910	2477
Current Assets, Loans
and Advances	10384	10512
Misc. Expenditure	6	10
Total	25752	19394

Though Tata Motors has strong fundamentals, the macroeconomic situation is adverse and its acquisition of JLR is adding extra burden on its performance. However, with a strong balance sheet and backup of the biggest group of India Tata Motors should be able to wither off these concerns and emerge out of this crisis.

This however doesn't eliminate the risk that in near future it may see its credit rating getting downgraded. Hence, the question: is the spread between interest rates offered in the scheme and risk free rate adequate enough to compensate for the risk. It is more favorable to Tata Motors as it has a very strong brand reputation and the risk free rates are on downward movement thereby increasing the spread and making the scheme a very attractive investment option.

Decline in inter bank offer rate indicates easing liquidity

The BSE Inter Bank Offer Rate (BIBOR) which reversed its upward move in October last year is continuing to go down since then. There are four kind of BIBOR: o, 14 day, 1 month and 3 month. The overnight BIBOR which generally has high volatility is showing signs of stability at lower rates. This is the best indication that the liquidity situation has improved a lot since November last year when the overnight BIBOR rate touched as high as 20% as banks were not willing to lend money even for short term. The decrease in CRR, repo and reverse repo rate has increasedthe money supply into the system thereby releiving the pressure from banks to maintain liquidity.

Source of Data: BSE

Retail debt market in India

The top Indian stock exchanges, BSE and NSE, offer trading in debt instruments for retail investors. The Retail trading in Debt Market was started in January 2003. All investors who have equity broking account can trade in the Retail Debt Market. The debt instruments available for trading are government securities (G-Secs or Gilts). Government securities are issued by government and have no default risk (sovereign bonds). Government issues these securities through auction to major players like banks and other financial institutions. After that trading on these securities occur in secondary market. Government pays coupons (equivalent to annual interest) on these securities to its holder. G-secs are characterized by the coupon rate (usually expressed annually) and maturity (the time after which the securities can be redeemed). The returns from a G-Sec are the coupon payment every six months (half the annual coupon rate) and the face value payment at the maturity.

G-sec are a cost-effective way of raising long term money for government and it is a long term secure investment for investors. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements.

There is tax benefit associated with the G-sec investment. Apart from having no tax deduction at source, G-sec offer tax rebate of Rs 3000 under Sec 80L of IT act.

About government securities

Face value = Rs. 100
Minimum size = 10 units
Credit Risk = NIL

Coupon rate = total interest paid by the government to the G-Sec holder.
This coupon amount in paid in two equal instalments (half of coupon rate every six months)

Maturity = the date till which the G-sec is issued for. At maturity government pays back the amount equal to the face value of the security.

Accrued Interest rates
Since government securities pay interest at fixed interval of 6 months, anyone buying G-sec from secondary market is entitled to the partial interest payment depending on when he buys the security. For example, if an investor buys G-sec which has its coupon due after next 4 months, he/she will have to pay to the seller the interest for 2 months in addition to the market price. This is also called the interest accrued. In NSE and BSE trading systems, the accrued interest is added to the price of the G-sec while entering the quote on the system.

Dirty Price and Clean Price
The price of G-sec without the accrued interest is known as Clean price while Dirty price includes the accrued interest.
Dirty Price = Clean Price + Accrued Interest

Valuation of G-Secs
The price of G-sec is relatively easier to obtain than the price of an equity. The cash flow in the case of G-Sec are known with certainty. The only debatable factor is the discount rate at which these cash flows will be factored since they will be available at a future period. Knowing it, one can easily discount the cash flow streams with their respective discount rates to bring down their present value. The discount rate is all that creates some uncertainity and involves different parties trading actively to make profit.
Working reversely since the price of a market traded G-Sec is available one can find the effective discount rate which the market is assuming. This rate is termed as yield-to-maturity.

Premium and Discount
The face value of a G-Sec is Rs 100 but it can trade anything above or below 100. When it is trading above 100 it is said to be trading at premium and on the other side when it is trading below 100 it is said to be trading at discount.
Generally the premium and the discount for a G-Sec depends on its coupon rate and prevailing discount rate. A G-Sec having coupon rate more than the current discount rate is likely to trade above Rs 100 and hence at premium to its face value.


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Challenges ahead for Indian Monetary Policy

The much expected rate cut by RBI did not happen. In the midst of all the all sorts of speculation, RBI has adopted a policy of wait and watch for the time being. So what’s there left in Indian market in coming days? The impact of differential interest rate is going to have diverse effect. The following heads could be one way to summarize the future move.

More inflow of dollar is expected in the coming months and the huge capital inflow will further complicate the monetary policy. Rupee has already appreciated by almost 12.3% against dollar in last year and further gain could worsen the plight of export industry. Textile industry has already lost more than 50,000 jobs the issue needs to be addressed soon.

We witnessed the lowest inflation of last 5 years in December 2007, but the wholesale price index rose 3.93% in the week ended January 19. This inflation was highest in the last five months. The huge capital inflow in the market from outside is expected to put pressure on inflation. The petroleum price hike also seems imminent and this going to further accelerates inflation. RBI’s stand on keeping the interest rate intact reflects that curbing inflation is of highest priority at this point of time.

Large capital inflow has increased the liquidity in the market and monetary policy has got complicated, RBI needs to be flexible to act on each and every global clue to keep the interest of one and all.

Economic Fundae - Interest Rates

It is a really a good time to start with the economic fundamentals as there is so much happening across the globe with recession and our phenomenal growth story. It becomes easy to see what we are discussing in theory in the real life. Inflation is something most of the developing nation is fighting against. At least in India, the Reserve Bank of India has done a great job in controlling the soaring price rise that happened in 2007. But what are the policy that RBI has at its disposal to control inflation? These are largely the tools and policies different from the fiscal policy.

Before answering this question we will look into one of the important macroeconomic variable which connects the present with the future – Interest Rates. The rates which our bank pay is called as the nominal interest rate and this measure the increase in the value of the money we hold. It can be seen as the amount that we get paid for forgoing the consumption at present.

The other class of interest rates is called the real interest rates which are essentially the increase in the purchasing power. Think of a capital as a corn seed. The increase in value from the seed to the corn is the real increase in value. But due to the general increase in prices of other commodities – inflation our corn will fetch us more money than the actual value. This is called the nominal value which is the real value plus the inflation.
R = I – πe
This equation gives the relationship between the real interest rate and the nominal interest rate & inflation rate.

Why is there a fluctuation in the interest rate? This is dependant on the amount of money in circulation. Now the big question is whether the RBI sets the interest rate or sets the money circulation? It sets the money supply.

It is done through a series of steps called as the open market operations. In this the central bank buys bonds – a debt instrument, in exchange for money, thus increasing the stock of money, or it sells bonds in exchange for money paid by the purchasers of the bonds, thus reducing the money stock.

Now ask yourself this question, what will happen to the exchange rate if the central bank sells $1 billion from its foreign currency reserves?

We fairly understood about the strict monetary policy. Now it is time to see what is happening in the scenario of recession. The U.S central bank has announced a interest rate cut in order to combat the recession. By cutting interest rates the FED would be boosting U.S economy by making it cheaper to borrow. But it has its implication also in the spending habit. This artificial intervention of the central bank is rarely seen unless it is absolutely necessary to do so.

The other side is the reduction in the earnings due to the interest rate cut. This will immediately give arbitrage opportunity for investors to borrow money from the U.S banks and invest in a country like India where the interest rates are higher. Sensible isn’t? But is it what our finance minister will also be happy about? We will see in the subsequent article of the critical analysis of the forth coming budget and the interdependency of the various macroeconomic variables we have learnt so far.

Rupee appreciation and its after-effect

The rupee has witnessed around 12% appreciation last year, the most since at least 1974. On 16’th Jan 2008, it was quoting at 39.068 per US dollars (USD) against 44.28 at the end of 2006. The strong economic fundamental is one of the major factors for attracting Foreign Direct Investment (FDI). The appreciation got further strengthened by the sub-prime crisis in US. The sub-prime crisis in US led to fall in US market and investor started taking their money out. They looked for the best market to invest and found Indian market more attractive. According to Security and Exchange Board of India (SEBI), the net investment in India by FII was 19.53 bn USD in 2007 as compared to 8.87 bn USD in the year 2006, a 120% increase in the FII inflow. As per the data from commerce ministry, Foreign direct investments through august last year totaled $12.9 bn USD as compared to $11.1 bn for the whole of year 2006. This high inflow of money from the international market has increased the demand of rupee significantly and that has propelled the sudden surge in value of rupee against dollars. This could have impact on various aspects including trade, inflation and government policy as well.

International Trade:

The strengthening of rupee has made import attractive while it has severely impacted the export. Export growth slowed down to an average 17% till Oct, 2007 from 21.3% a year earlier. The current account (Account for export and imports) deficit widened in the three months through September to $5.5 bn, while the capital-account (Account for FDIs , FIIs and overseas borrowings) surplus more than doubled in the quarter to $34.75 bn. IT business is one of the worst hit industries with all the companies showing slump in growth. These companies have sought for government interference, which is yet to be addressed.

Petroleum Prices:

The soaring crude oil prices has always been a cause of concern for India oil companies with no say in the domestic pricing of petroleum products. The $100 per barrel crude oil would have left government with no other choice except increasing the oil price, which no government will be willing to do when hardly a year is left for the Lok Sabha election. The appreciation in rupee has helped government to compensate the high oil price to some extent.

Impact on Inflation:

January 2007 witnessed the highest inflation in last 3 years because of increased demand for pulses and general goods with supply constraints. The appreciation in rupee made import cheaper and hence decreased price, which led to decrease in inflation to almost 5 years low in December, 2007.

As the full impact of subprime is yet to be amortized and expected further cut in Federal Reserve interest rate, the rupee is expected to further appreciate to 38 per dollar by the end of this year.

Goldman Sachs & Merrill Lynch comment on recession of US economy

According to a report from Merrill Lynch, US economy is already in recession. It refers to the employment report as an confirmation of recession. The unemployment rate of 5% in December was supportive of this view. The housing market is already falling and consumer spending is also lower.

While Goldman Sachs declined the recession in the US economy, it predicted that recession is very close and US economy may see it in 2008.

Goldman Sachs beleives that the slowdown in the US economy will affect the interest rates, since Fed bank may choose the option of lowering rates from 4.25% to about 2.5%

Goldman Sachs cautioned the investors to stay away from banking and finacial sector and increase their holdings of healthcare and consumer-related stocks.

China's bank reserve ratio may increase

According to a report by ICBC (The Industrial and Commercial Bank of China) the reserve ratio required for commercial banks can reach 15% in 2008. Currently the ratio is 13.5%, which is a ten year high. More monetary tightening is expected to follow in order to curb the inflation and deal with rising Yuan. The ratio requirement has been increase nine time in this year and has crossed the previous highs of 13% observed during mid 1998. The reserve ratio hike will suck about $25 billion from the money market and reduce the surplus liquidity.

A good analysis on the tightening measures taken by Chinese central bank and its repercussions is done Lu Jianxin and is available with Reuters.

Dollar continues to fall against major currencies

The dollar maintained its fall and reached a record low against Euro amid the speculation that US subprime worries may further force Fed to cut interest rates even more.

Hedge funds are dumping dollars heavily and the fall looks like a long term trend with lots and lots of uncertainties surrounding the short term outlook. So its fair on the Brazilian supermodel Gisele Bündchen's part when she preferred to be paid in Euros. Bündchen joins the millions who have lost faith in dollar. Earlier Warren Buffet had expressed that his faith on dollar is dwindling.

More news article on this:
Gisele Bundchen: 'I won't get out of bed for US dollars'
New low for the dollar as top-paid model demands her fees in euros
Supermodel Bündchen joins hedge funds in dumping dollars

Gold price hit 28 year high

Spot gold today hit a high of $814.10 an ounce and closed above $800 levels. This overtook the previous high price of January 1980. Gold and Oil prices are surging since the sub-prime woes are affecting the stock markets and metals are seen as a safe place for investment. Yesterday Citigroup announced that it could have to write-down about $11 billion due to bad mortgage.
The record high for gold in Nymex is $875 set on January 21, 1980.

Some causes behind the current spike in gold prices are:

• Low interest rate (Fed cut the rates last week to 4.5%)
• Sub-prime crisis creating uncertainty in stock markets
• Dollar is weak against other currencies
• Crude oil is at all time high
• Turkey-Kurdish conflict
• Supply concerns due to union's problem in South Africa after several deaths in mines.

In 1990 gold prices soared because:

• Iranian revolution (1979)
• Russia's intervention in Afghanistan
• Strong oil prices
• High inflation

Though inflation adjusted price of gold is nowhere near the highs reached in 1980s still the trend seems to be intact upwards and may very soon cross the all-time nominal high price.

Crude oil price scales new heights

Crude oil price crossed $93 (€64) a barrel in New York.
In London, Brent Crude hit an all-time high of $90 a barrel.
In October the price has risen by more than 16%.
In the year 2007 it has increased by more than 50%.
The current price of crude oil is an all time high in nominal dollars. However inflation adjustments make it slightly below the peak touched of $101.7 in April 1980 (Iran cut the exports).

The trend for the crude oil price is shown below:


Reasons for sharp rise:

Mexico shut one-fifth of its production due to bad weather in Gulf of Mexico.
OPEC is not increasing production to compensate for the reduced supply.
Peak demand period because of northern hemisphere winter season.
Tensions between Turkey and Iraq over Kurdish militants.
U.S. sanctions over Iran's nuclear program.
Dollar has touched a record low.
Oil futures are being used as hedge against the weakening dollar.

Fisher Equation - Real & Nominal Interest Rate under Inflation

Equation was derived by Irving Fisher
Effect of inflation on interest rates

Let
Rn = Nominal Rate of Interest
Rr = Real Rate of Interest
Ri = Expected Rate of Inflation.
The above rates are in terms of per $ (not %); then according to Fisher

(1+Rn)=(1+Rr)(1+Ri)

which can be approximated as
Rn = Rr + Ri , since interest rates are quite less than 1.