A landslide victory for Prime Minister Narendra Modi’s National Democratic Alliance paves the way for continuity of economic policies. The central government’s policies are critical in determining the future of interest rates and stock market trends. These have a direct implication on your finances.
What the verdict means
Prime Minister Narendra Modi won the 2014 election on the back of a ‘Sabka Saath, Sabka Vikaas’ (Together we all, development for all) platform. The mandate last week indicates that voters expect the government to complete the agenda promised in 2014. Despite a mixed performance on the development and economic plan, voters decided to give it another chance.
Proper economic management of the economy matters for your money. If government finances go haywire where expenditure rises and income (through taxation) declines, then the government has to resort to higher market borrowing. That takes away money from the economy and leaves little for businesses to fund expansion. Interest rates rise as the money supply is finite.
In this context, the government has managed to keep the fiscal deficit in check over the past four years. Along with the Reserve Bank of India, the government has also led to keep the inflation in check too.
What to expect
The government may continue to curb consumer price inflation. However, this objective runs straight into the other significant promise made in 2014. The government had said that it would double farmer income by 2022.
If farmers and producers of food and food grains are to get a higher price for their produce, there is a need to either let consumer prices rise or overhaul the farm-to-market system. Considering the promise made to consumers and farmers, the government may take steps to bring efficiencies in storage and distribution of farm produce.
All the money saved in disintermediation or removal of middlemen in the supply chain could be passed on to farmers. However, all this is easier said than done. The government may have to keep on increasing the minimum support price for farmers steadily. But, many believe that this is inevitable.
The impact on inflation
Besides addressing the farmer income issue, the government will have to also deal with rising international oil prices. India’s oil dependency has not reduced despite efforts put behind non-conventional energy sources or energy conservation.
Any turmoil in global oil prices continues to increase India’s import bill and affects current account deficit as exports continue to remain stagnant. The world economy is turning more inwards and less conducive, and trade wars could hurt India’s future capability. All this means that the rupee would remain range-bound or weak.
That also influences the RBI’s decision-making on interest rates. With pressure on both fiscal and current accounts, RBI cannot rapidly bring down interest rates.
What you need to do
A key event to watch is the Budget to be presented in early July 2019. The government approach towards managing finances would indicate the interest rates and inflation outlook. It will determine the money you get for your fixed deposits. While interest rates in the short-term are expected to stay firm, they may decline gradually over the next few years. You may have to plan investments in fixed income schemes accordingly.
On the equity markets, there is a substantial run-up in share prices over the past few days. Share prices are well ahead of their fundamentals, determined by corporate profitability. For-profits to surge, the government has to bring down borrowing rates and cut taxes simultaneously. It is unlikely to happen immediately as the government needs higher revenue to fund ambitious infrastructure and social development projects.
Most stock market analysts predict only a 10-12 per cent rally over the next year and a large part of that has already happened. Investors should avoid short-term investing in equity markets. If you are willing to make a long-term investment, you need to continue investing through systematic investment plans in the index or diversified equity funds.