How to make sense of too much information
In financial markets, knowledge is everything. Over the past week, there was an information deluge. The government presented the Union Budget 2021 last Monday. Before that, the government released the Economic Survey for 2020-21. As you were digesting all that data, corporates continued to flood the market with quarterly results announcements.
Last Friday, the Reserve Bank of India’s monetary policy committee left key borrowing rates unchanged. The six-member committee continued to follow an ‘accommodative’ credit policy stance as the government announced a higher borrowing for the year 2020-21.
As you process that information, you may wonder about the limit to which you can process financial, economic or stock market information.
Several factors influence your finances. Interest rates being one of them. They would control your borrowing, your savings in banks or fixed deposits and also have an impact on your investments in financial markets.
Quarterly financial results influence businesses and virtually your investment in the stock market. Macro-economic data and budget-related announcements not only affect your spending but savings and investments as well.
Inflation and interest rates
You need to understand the interplay of inflation and interest rates. The Reserve Bank of India’s professional forecasters’ outlook indicates that the consumer price inflation is expected to be at 5 per cent in the quarter to March 2021 and the first quarter of the next financial year to June 2021. It would moderate to 4.1 per cent subsequently. The RBI’s household inflation expectations survey suggests that over 88 per cent of households expect inflation to increase in the next year. Most households are worried about rising food prices.
However, the RBI’s monetary policy committee does not appear to be concerned about food inflation.
“The bumper Kharif crop raised prospects of a good rabi harvest. There are larger winter arrivals of key vegetables and softer egg and poultry demand on avian flu fears and other factors auguring a benign inflation outcome in the months ahead,” said the committee on the inflation outlook in a statement.
However, as India ends lockdowns, the pent-up demand for goods and services from businesses going back to work would push up prices, the committee pointed out.
The other issue that could put pressure on interest rates is the high government borrowing programme.
Overall, the interest rate situation seems balanced for the RBI committee to hold current levels to support economic growth. That means your borrowing rates can remain stable for a while.
You could opt for a home loan now or negotiate a better rate on your existing home loan from your bank.
Average home loan rates hover between six per cent and seven per cent. They are likely to remain there for some time. If you have always been thinking about owning a home, it may be an excellent time to work towards it.
Growth and stock markets
The outlook for economic growth is buoyant. Last week’s Budget announcement was received as a ‘pro-growth’ budget encouraging businesses to spend more on building capacity.
The higher government borrowing will be used for capital expenditure where the government would invest in roads, transport and other asset creation. That should be good news for businesses in the construction sector.
They can bid for government contracts and generate new revenue.
The RBI’s monetary policy committee has said that the urban demand and demand for contact-intensive services would strengthen with the substantial fall in Covid-19 cases and vaccination spread.
“Consumer confidence is reviving, and business expectations of manufacturing, services and infrastructure remain upbeat,” the monetary policy committee said on the growth outlook projecting a 10.5 per cent growth in 2021-22. The IMF expects India’s economic growth to bounce back to over 11 per cent in 2021-22.
For the corporate sector, that is good news.
Prospects for revenue and profits have improved. If you are an investor, stock markets are already at a record high. Over the past six months, large caps, mid-caps and small-caps have all gained 30-40 per cent in value. Investing is a challenge for everyone.
You may wonder about identifying the right companies. The year-long lockdown has put undue pressure on the balance-sheets of small companies. However, many companies in the unorganised sector have been affected adversely and are unlikely to revive soon.
That has helped companies with strong balance-sheets in the consumer, electrical equipment, farm equipment and other manufacturing sectors. You may want to seek expert advice before buying into winners of the lockdown 2020.
(The author is editor-in-chief at www.moneyminute.in)
6-7% Average home loan rates. For now, the rate is likely to remain stable
The ideal time to own a house
The interest rate situation seems balanced for the RBI committee to hold current levels to support economic growth. That means your borrowing rates can remain stable for a while.
You could opt for a home loan now or negotiate a better rate on your existing home loan from your bank.
5%: Consumer price inflation forecast till June. Watch your interest rates!