Int. rates during early nineties were close to being somewhere in the range of 12-14% per annum. So effectively, money put into a FD would double in 5-6 years (rule of 72). They stayed in this range for almost the entire nineties. So effectively, if one were to invest Rs.100,000 at the beginning of the nineties, the investment would have grown to:
Rs.200,000 by mid-nineties and close to Rs.350,000 by the end of nineties. Thereafter, interest rates have averaged at around close 7-8 per annum, so Rs.350,000 would have become something like Rs.500,000.
Returns - 5 times over the original investment, or a compounded avg. of close to 10.6% per annum.
Now, in early nineties, the Sensex was quoting at close to 3,000 levels. Today, the same is around 14,000. This comes to pretty much the same, ie around 10 per cent per annum, though when it comes to compounding, even a 50 basis point difference is quite significant.
Btwn, I noticed a few things over the last few days:
- SBI is currently offering interest rates of close to 10.2% per annum (compounded quarterly or semi-annually, i think) for FDs over a period of three years, and
- Force Motors is offering interest rates of close to 12 per cent per annum for a FD of a similar tenure.
This means, Corporate India is quoting at levels where its earnings yield a mere 5 per cent per annum as compared to banks or some companies which are offering interest rates of close to 10 per cent. Both I think cannot co-exist for long. So what will move first? Interest rates (down?) or corporate india's valuations (down?).