Whenever central bank governors talk about financial stability, it can be easy to tune out. RBI Governor Sanjay Malhotra recently spoke at an economic conclave and said that Financial Stability is not an abstract concept, but an everyday public good. His address has something for your household balance sheet. Your financial stability is not just about removing possible shocks. It is also about building resilience so that those inevitable shocks do not derail your life.
Governor Malhotra spoke extensively about the surging global debt and rising borrowing costs. Businesses tend to refinance expensive debt; however, with rising interest rates, that is not easy either. The situation will affect all loans you have taken at a floating rate. As interest rates inch up, they will start eating into your spending money. The lesson here is immediate. You may want to cut all credit card debt straight away. It may be a good idea to take a personal loan if you use a bank's revolving credit facility and pay off your credit card outstanding balance. Take your financial advisor seriously when they say you should keep EMIs below 40% of your take-home salary. If you had taken the advice to keep six to nine months' expenses in liquid funds, you could easily ride through this phase. If not, you learn that for financial stability, you need a margin of safety. When interest rates rise, that margin of safety shrinks if you haven't set aside enough. It is a risk to your finances.
The RBI governor stopped short of calling stretched asset valuations around technology and AI-driven euphoria irrational exuberance. Former US central bank governor Alan Greenspan used that term to describe the technology bull run in the late nineties. From your standpoint, you tend to chase returns towards the end of such euphoria. When prices rise to several multiples of profits, even a minor slowdown could trigger a sharp correction. When share prices surge to a record high in a particular sector or a market, it is not the time to be brave and ride along. You need to ensure that you are following your pre-determined asset allocation plan. Long-term potential does not guarantee short-term returns forever.
In his speech, the RBI governor discussed the rise in borrowing by non-banking finance companies and other non-bank organisations to chase higher yields. You borrow at low rates and invest in higher-yield instruments to make money. That happens when NBFCs look to improve their treasury yields. He warned of possible contagion that could hurt the financial system as money flows dry up. For you, it means not dealing with unregistered intermediaries for higher returns on your fixed-income savings. It is a good idea to stick with high-quality, regulated instruments like government bonds, target maturity funds, and deposits with top banks instead of chasing an extra 1.5% return.
Like many other addresses on financial stability risks, Governor Malhotra again highlighted the need to defend your digital footprint from cyber risk and fraud using artificial intelligence. He argued that these threats have now moved to your smartphones. If your one-time password is compromised or you download applications that trigger screen sharing, your years of savings and investments that compounded steadily could vanish in minutes. For you, it means not believing things you hear on the phone or on reels that sound too good to be true. You may want to segment your accounts. Keep your investments and savings in one account, and maintain a separate expenditure account for UPI and card spending. Lock your long-term savings and investments with two-factor authentication, biometric logins, and restricted transactions.
Governor Malhotra spoke about financial stability as an economy's ability to anticipate storms and absorb them without breaking. You need to do the same thing with your finances.
