• PAGE ONE
• INDEX
• HOME

Does HDFC support soft rates view?

T.B. Kapali

THE Liquidity Adjustment Facility (LAF) put in place a month back by the Reserve Bank of India is still an evolving concept and everybody is on the learning curve, the central bank's Deputy Governor has said. This statement quite clearly implies that no definite conclusions as to whether the RBI has sent tight money signals (in the past month) can be made at the present juncture.

Can domestic financial markets - bond and interest rates - draw comfort from this statement and frame their borrowing/investment strategies accordingly?

It will be interesting in this context to have an insight into the recent funding decisions/strategies of a leading financial intermediary. That will give a clue as to the leader's views on interest rates going forward.

Housing Development Finance Corporation (HDFC) seems to think that a soft trend in interest rates could be maintained going ahead. The compositional adjustment which it has undertaken with respect to overall funds employed for the just ended fiscal -- 19 99-00 -- appears to indicate so.

As the accompanying chart shows, long-term borrowings have increased sharply in 1999-00 -- much more than public deposits -- and have emerged as the largest component of overall funds employed. And the contrast with earlier years is quite cl ear.

More significant is the nature of the long-term borrowings the company has undertaken. Out of close to Rs. 2,000 crores in long-term funds raised last fiscal, 60 per cent or Rs. 1,200 crore has been in the form of term loans from banks. These term loans are linked to the PLR/MTLR of the banks and hence are floating rate loans. Equally significant is that out of Rs. 2,700 crores of term loans outstanding as on date, around 90 per cent is on floating rate terms.

Quite clearly, the company is not going to tie itself to floating rate liabilities unless it thinks rates are on a downward path.

The fact that the company has also raised around Rs. 800 crores in 1999-00 in NCDs (which are fixed rate liabilities), of course, tempers this view about soft rates.

That NCD mobilisation could well be some kind of a safety valve for HDFC -- assuring it medium-term funds at a fixed rate even in case rates rise. The macro view on soft rates may still hold good and could still be capitalised on if appropriate optio n features have been built into the NCDs.