If you survive, count your blessings. It is like a global war against an unknown enemy. Close to half a million people are sick, over 20,000 have lost their lives and 170 countries are affected. The speed of infections has slowed or flattened in mainland China if official data is to be believed. But it is surging in the US and Western European countries.
The Organisation of Economically Developed Countries, an international body of rich countries in Geneva, said in a report that major economies are set to contract by at least 2 percentage points for the months they are locked down. Australia has already announced a six-month lockdown. India is under a three-week one.
Uncertainty rules across the board. In such a situation, volatility in financial markets would remain elevated for days to come. The government has announced relief in tax compliance for individuals and businesses. It has committed to put Rs 1,70,000 crore for relief to the poor and the marginalised in the country.
The 40 crore Jan Dhan accounts could have never been used the way they could be now.
The Reserve Bank of India brought out their artillery by injecting close to Rs 4,00,000 crore in the banking system.
Banks have adequate resources to lend money to small businesses. RBI has also made it unattractive for banks to keep the money with RBI. Banks would now look to lend more or provide relief to existing borrowers by reducing interest rates following a 0.75 per cent cut in the repo rate. RBI reduced the rate it charges banks for the money last week.
What does that mean to you
Your banking liabilities are frozen for three months. It means that you do not have to pay your loan instalments for that period. That does not mean your loans go away. The repayment is deferred by three months. If you are employed, your employer may still be able to process your pay. There is a relief given to businesses too, so that they can meet their employee-related obligations for the next three months. However, investing is not just about next three months. Moody’s, a credit rating agency, has slashed India’s growth rate by more than half to 2.5 per cent for FY 2020-21. CRISIL, a local rating agency, has also substantially cut prospects for India’s growth.
Future profit growth of businesses determines today’s stock market value. If there are no profits for the foreseeable future, nobody can be a buyer in the market. History tells us that financial markets bounce back smartly from such situations. If you look at the lows of FY 2008-09, the S&P BSE Sensex is still trading at a value that is five times more. So a simple investment in an index fund at the bottom of FY 2008-09 could have appreciated five times even after the correction of 2020.
There is an overwhelming noise that suggests buying into depressed equity assets. However, you need to tread with caution. If you are looking to build a portfolio and you need that money only 15 years later, you can start buying shares. Do not go overboard and buy too many of them. It is important to take expert advice in picking them.
However, if you are looking to simply preserve your capital, keep your money in a fixed deposit or a bond fund or a liquid fund. When financial markets return to stability and there are signs of profitability returning in subsequent quarters, you can allocate more money towards index funds each month.
The fear index
The obvious question could be about knowing when stability comes back to financial markets.
A bigger worry for financial markets is the inability of the Reserve Bank of India to hazard a guess on growth and future inflation. That does not send a good signal. It would continue to remain like that till data points are consistent and stable.
A period of uncertainty is measured by the volatility index. The swings in the India VIX index tell us the story. It typically hovers around values like 1 to 20 in peace times. Currently, it is over 70. That is a level never seen before. Global investors follow the VIX CBOE (Chicago Board of Options Exchange volatility index). It is over the 60 mark and in the same territory as in 2008. The moment it settles to the average range under 20, you may see stability returning to financial markets worldwide.
(The writer is editor-in-chief at www.moneyminute.in)