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Peaking Interest Rates: Time to revisit debt MFs?

For the past few months we have been hearing a lot about the happenings in the debt markets across the globe. While the global economy has been struggling to get over issues such as Euro zone sovereign crisis, US debt ceiling and subsequent rating downgrade to name a few; back home, the RBI has been taking some aggressive policy rate actions. Now you would be wondering if there is so much of uncertainty even in debt market investments then how you will be able to park your safe funds which you need after some time and what should be your strategy if you wish to invest in domestic debt markets which are relatively safe compared to wildly swinging domestic equity markets . Will your debt investments be able to outperform your equity investments?

But before moving on to the argument of expected performance of debt vis-a-vis equities, first let us understand the factors that have impacted the domestic interest rate movement and debt instrument performance so far.

Inflation and interest rates are two data points that are closely watched not only by the central banks but also by economists and market pundits. There will rarely be two opinions about their usefulness. Low to moderate inflation and benign interest rate scenario is considered a precursor of high growth.

In India, RBI controls the flow of money in the economy. It pumps in or sucks out liquidity depending on the level of inflation and the estimated growth expectations. Inflation has been persistently high for more than a year now and it is clearly out of the comfort level of RBI.RBI has waged a war against inflation by raising rates 11 times stubborn political succession since March 2010.

Chart below shows that despite all the work done by RBI to tame inflation, the WPI inflation rate has not been able to calm down convincingly. After dipping slightly in May 2011, the WPI inflation resumed its upward trend again.

Fuel Fix » BP calls search of Moscow office an illegal raid

MOSCOW — Russian bailiffs searched BP’s Moscow office Wednesday because of a minority shareholder’s lawsuit, the company said, calling the action an illegal raid.

BP’s Russian spokesman Vladimir Buyanov told The Associated Press the company was cooperating with the bailiffs. He said no documents were seized and the situation in the office was “calm.”

The search is connected with a lawsuit in a Siberian court. Andrei Prokhorov, an obscure minority shareholder of BP’s Russian venture TNK-BP, is suing the British oil giant for allowing an Arctic exploration deal with the Russian state-owned energy firm Rosneft to fall through. Prokhorov is seeking some $3 billion in damages. He said his interests were harmed as TNK-BP could have benefited from becoming part of the deal.

In London, BP spokesman David Nicholas said the company does not think that “there is any legitimate basis for the raid today.”

He said the work of the BP PLC office was “illegally being interfered with.”

The multibillion-dollar Arctic deal between BP and Rosneft collapsed earlier this year after Russian TNK-BP shareholders contested the deal. They said BP was breaking TNK-BP’s shareholder agreement by entering into a deal without the venture’s knowledge or consent.

Rosneft on Tuesday teamed up with Exxon Mobil in a landmark deal to develop offshore oil fields in the Russian Arctic. Rosneft’s spokesman said there was no way that BP could revive the Arctic deal with Rosneft now.

Dmitry Chepurenko, an attorney for Prokhorov, said in an email that the bailiffs were enforcing Tuesday’s ruling of the Tyumen Court of Appeal that ordered BP to present documents related to the planned deal with Rosneft.

Prokhorov and his team deny any links with TNK-BP’s Russian management.

Major Russian companies have often used local courts as a powerful tool of negotiation and often intimidation. It is not uncommon for Russian businessmen to put forward an obscure shareholder who would sue the other side of the conflict on their behalf but would be technically independent of either parties.

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