The first half of the year has been quite tumultuous for all countries. The war continues, and this has had ramifications for crude oil prices, which, in turn, have affected currencies as well as bond yields. The Trump ‘hide-and-seek’ game with Iran has cast a shadow on the possible end of the war. Further, the USA has brought back the 100% tariff issue on countries that are trading with Russia. In this situation, financial markets have been jittery most of the time. The Federal Reserve has shown character and persevered with what it should do notwithstanding the constant haranguing from the top. All this has transpired under the phenomenon of inflation, which is rising everywhere.
India’s inflation has averaged 4.2% so far and is poised to cross 5% by the end of the year. In such a scenario, how have the returns on different instruments fared during this half of the year? This is important because when the financial year began for us, it was expected that sanity would unfold on the war-front and that volatility would largely be curbed. Any decision taken by households on where to invest money would have been difficult. For those who were willing to wait, the journey continues, while for those who wanted to reap quick returns, things would have been different.
Equity markets deliver modest returns
The stock market has been the main driver of capital markets and, given the mood swings on the war as well as commodity prices and central bank positions, has not fared quite well during this period. The IPO market surprisingly was buoyant. Assuming one entered the market in the last week of March, before the financial year began, and sold by the last week of September, the Nifty would have given a return of just 1.4%. It was not surprising that there was also a tendency for retail participation in mutual funds to slow down and a greater preference shown for conventional bank deposits.
Bank deposits and small savings offer stability
Bank deposits have grown by 5.3% over March this year against 4.3% last year. A 1-year deposit booked at the end of March would have yielded 6.6%. However, if one looks at the weighted average term deposit rate on fresh deposits for the end of March, it would be lower at 6.07% and 5.79% for April. But it would still be higher than the returns in the equity market and a positive real return.
An option would be to go in for the small savings schemes, which would give higher returns relative to bank deposits. Post office term deposits provided returns of 6.9-7.5%, depending on the tenure of 1 to 5 years. A National Savings Certificate, which is for a longer tenure of 5 years, would have given an assured return of 7.7%, while the senior citizen deposits (which have a cap on how much can be invested) gave the highest return of 8.2%, followed by the floating rate bond with 8.05%.
Government and corporate bonds
At a different level, government bonds, too, gave steady but moderate returns, ranging from 5.66% for 1 year to 6.86% for 10 years if bought in the last week of March and held till the end of September. While the value of these bonds has changed with yields moving up and prices down, for investors who hold till maturity there would be no impact.
If one, however, ventured outside the zone of safety and opted for highly-rated corporate bonds, the returns would have been higher. The AAA-rated bonds would have given returns higher than those on small savings and could range from 7.29% to 7.67% for 1 to 10-year-old bonds if purchased in the last week of March. If one ventured into lower-rated bonds, the yields would have been higher but with higher levels of risk, where there could be a higher probability of default.
Rupee depreciation and commodity returns
Turning to currency, the rupee has been volatile but also subject to policy intervention through the FCNR scheme, which brought a halt to the continued depreciation. On a point-to-point basis, the rupee declined by 1.8% if weekly rates are considered and 2.9% if the same is extrapolated to the months of March and September. These returns are much lower than those given by the debt instruments and deposits.
If one looked at commodities, gold glittered with the price moving from Rs 1.41 lakh per 100 grams to Rs 1.51 lakh with a return of 7.9%. A part of this was due to rupee depreciation and the higher duty imposed by the government, as the return was much lower if reckoned in dollar terms in the international market. However, crude oil did not quite work with the increase for Brent, which was just 3.8%, as prices moderated post-March to the beginning of September before the war commenced again. To take advantage of these gains, investors would have to trade in the futures market to take such positions.
Fixed-income investments emerge ahead
The emerging picture is that during the first half of this year, it made more sense to go in for fixed income instruments for deploying savings rather than equity. This would be the mode to follow in times when there is a lot of volatility in the markets caused not by economic but by political upheaval, which is hard to conjecture. It does look like the rest of the year, too, would follow a similar pattern.
This would be slightly ironic, considering that India Inc. has registered a very healthy growth in profits in the first quarter, which is likely to be sustained for the rest of the year. The economy, too, is doing very well with 7% growth and should ideally have provided a boost to the equity market. As this is not the case, for households the conventional avenues of savings, i.e., deposits and bonds, would provide stable and known returns, which is probably more important.
The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.
