How to use economic and market indicators
Investing is a lot about making sense of the data. You need not be a ‘finance’ person.
Investing is a lot about making sense of the data. You need not be a ‘finance’ person. Even if you have numbers phobia, you can learn to use tools that help you translate numbers into everyday language. Fear from any data and numbers is in our mind. The moment you know how to read the trend in a chart or a table, you will be able to work it to your advantage. There is a lot of information publicly available that you could use to put the story together.
It is the most fundamental thing for your investments. The Reserve Bank of India (RBI) fixed the ‘repo rate’, the rate at which it lends money to commercial banks. RBI’s Monetary Policy Committee (MPC) decides on it. The panel of experts evaluates parameters like future inflation, economic growth, global trends and arrives at a ‘hawkish’ or a ‘dovish’ economic policy. In 2019, the RBI committee has cut the repo rate four times now to 5.15 per cent from 6.5 per cent. It has indicated in the policy statement that it would adopt an ‘accomodative’ policy stance.
If you are a senior citizen looking to generate a higher income through interest earned on fixed deposits, a cut in repo rates is not so good news. It would mean deposit rates for fixed and bank deposits would decline. If you are young and prefer fixed deposits, you may want to look at other options like balanced equity funds or equity-oriented funds.
The future trend in interest rates depends on consumer price inflation. The MPC does not foresee a significant risk to the inflation rate. It is expected to remain benign and continue to remain stable.
The RBI release highlights big worries are in this area. According to the assessment of the MPC, that sets borrowing rates, economic growth is expected to be slower than now going forward. There is a virtual crash in the ‘non-food credit’ by banks.
It is down to Rs 93,700 crore in the first half of 2019-20 ended in September 2019. It is a slump from Rs 1,65,200 crore in the first half of 2018-19. It perhaps explains the dramatic slowdown in the Indian economy. Banks have to lend money to businesses and individuals for consumption. If consumers do not spend money, it hurts the demand for goods and services.
The RBI committee’s cut of 0.25 per cent failed to enthuse markets. For economic growth to revive, many experts are suggesting a sharper reduction in borrowing rates. They are also proposing a cut in personal income tax to leave more money in the hands of the consumer.
These steps may revive consumption to some extent and nudge the economy. However, it is a bad news for senior citizens and other fixed deposit holders. Interest rates trending down further would hurt their income.
Indian stock markets have underperformed in 2019. Benchmark indices like Sensex and Nifty are marginally up by 4 per cent to 5 per cent, but small and mid-cap share prices have slumped by about 12 per cent during the same period. The government has cut corporate tax rates. That has stalled the slide in share prices.
A marginal increase in profit per share boosted the stock market sentiment. A cut in borrowing rates by the RBI committee can help if banks are willing to transmit it to borrowers. Despite 1.35 per cent cut in 2019, banks have not fully transferred the rate cut to borrowers. If consumers do not buy more goods and services, there may not be a significant revival in demand.
That would hurt corporate profitability. If you go by analyst estimates, they are not expecting a runaway rally in the stock market in the next year. Besides problems of an economic slowdown in India, global data is also indicating a weak global growth in the next few quarters.
What you should do
Interest rates are falling. Share prices are also sluggish. Usually, the trend is inverse. If consumer inflation is likely to remain stable over the next few quarters, interest rates may be trending down. At some stage, equity prices would deviate from this trend.
It is essential to meet your financial advisor to under the implication of this for your portfolio. You may want to advance your portfolio review from December to now if that is your cycle.
(The author is the editor-in-chief at www.moneyminute.in)