When economy is in slow lane

As India went into general elections, there was the hope of better days ahead. Financial markets got the government they hoped.

Published: 05th August 2019 08:11 AM  |   Last Updated: 05th August 2019 08:11 AM   |  A+A-

Economy

For representational purposes (Express Illustrations)

Express News Service

You invest in a promising future. You hope that your savings, when put to work, would eventually give you returns that would take care of all your future needs. As a result, your life savings find their way into property and gold, equity shares or bonds, equity or debt mutual funds, among other things. The quest is to be financially secure. 

Markets and economy have a mind of their own. Stock markets and currency markets rally ahead of a turnaround in an economy. They fall ahead of a downturn. They are a sort of a lead indicator for an economic rally. A lot of the upside in the economy is priced earlier by financial markets.  

As India went into general elections, there was the hope of better days ahead. Financial markets got the government they hoped. There was euphoria soon after election results in anticipation of big bang economic reforms.  

The dramatic fall in benchmark indices like the Sensex and Nifty recently coincided with a fall in 10-year government bond yield. Usually, the two are inversely proportional. Stock markets fall as investors expect a fall or slow growth in profits. Bond yields fall because traders expect interest rates to remain low in the short term. The benchmark for bond yields is usually the 10-year government securities bond. 

All this is fine if we are amidst a market cycle that goes up and down. At some stage, there would be hope that the economic or market cycle would turn around. However, if you talk to any economist, they will flag some severe concerns. India’s economy is facing a structural slowdown than a cyclical one, many said.   

What does all this mean?

Previous experience suggests that a structural slowdown takes long to unwind. A key trigger for the economy is usually an interest rate cut. The Reserve Bank of India sets the repo rate that is treated as a benchmark rate for lending by banks.

There is hope that RBI would cut rates again and enable banks to resume lending to borrowers. Due to the problem of non-performing loans, banks have to set aside more money to reserves than lend. Small and medium enterprises are unable to get the necessary capital needed to fuel growth and plan business expansion. Businesses are delaying all decision-making, and it is hurting job creation.

Weak job creation results in reduced consumption. HDFC Bank and Bajaj Finance have already reported a challenging outlook for the retail lending business going forward while announcing the financial performance for the quarter to June 2019. 

Household savings rate as a percentage of GDP has slumped by 6 per cent over the past five years. Analysts attribute this to income not keeping pace with consumption expenditure. That means household expenses have risen, but incomes have not. 

The other factor is that the government is borrowing from the public directly through post-office and National Savings Certificate at close to 8 per cent.

Bank deposit rates are much lower than that. It allows the government to use funds for infrastructure or other capital expenditure. However, banks do not get adequate deposits to lend to businesses that stimulate economic growth with business expansion. The net receipts to the government from small savings doubled at close to `1,30,000 crore in one year to March 2019, according to budget documents. 

The Indian economy needs a quick resolution of the non-performing assets held by banks so that they can start lending to businesses and individuals. Besides this, the government needs to make India an attractive destination for investment for all investors. However, foreign investors are currently in a panic mode.

The budget announcement last month has sent out confusing signals on the tax treatment of capital gains. That has resulted in foreign investors pulling out $1.5 billion from Indian markets in July 2019. With global interest rates falling and the Indian rupee remaining stable, foreign investors should find India attractive for owning financial and physical assets.

What you should do

A lot of decline in share prices is due to foreign investors pulling out money. The International Monetary Fund has cut India’s growth forecast for the year ending March 2020. CRISIL, a credit rating agency, has gone further and projected that India would grow below 7 per cent in 2019-20. 

It could mean that the future profits of businesses in Indian companies could fall or see slower growth. However, this should not stop you from owning quality companies directly if you are already investing.

You always have the option of investing through systematic investment plans of index funds and equity funds. If you are a novice and looking to start investing, there is no better time than the stock market slump to make a beginning. 
 

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