Persistent Inflation : The New Normal...When we will be able to break the vicious circle..

Inflation is so well entrenched in India at consumer level that whenever you go out and purchase any goods and services, it is invariably up. Retailers are looking to raise prices under any pretext. In all big towns in India, retailers are selling groceries, fruits & vegetables at a margin of 2-3 times of the wholesale rate in the guise of increase in Petrol / Diesel price, flooding and thus low arrival of products and so on. Surprisingly Government is silent for years and this is lending a helping hand to retailers to take prices to mindless levels. Moreover, there are doubts that  any body would like to devote time and energy to go to the Consumer Court to file a complaint against unorganized business where transactions are entirely cash based without any receipt. 

 

Now the next question arise how Government can restore price behavior in the unorganized cash based transaction economy. In older days, Government used to conduct raids against hoarding, quality checks or open market sale of certain items like grains, sugar etc. to control prices. Now a days, these things are looks like no longer practiced and government is, in any case, sleeping. 

 

What is the need of the hour is that Government should check and conduct price audits to understand prices at wholesale and retail level and then act accordingly to maintain price level.  In fact the current differential between Wholesale Price Inflation (WPI ) and Consumer Price Inflation (CPI) reflect this differential starkly at 5%. Thus it is amply clear that Government knows about it but maintains a stoic silence and hardly any initiative to bridge this gap. The current phenomenon of persistent high level of CPI for years can not be mitigated by RBI as this is so well settled in the psychology of retailers that they do not hesitate to increase the prices at every available opportunity.

 

How we can bring this cash based daily transactions into banking system ??  The answer is simple and ultra low cost. Adopt mobile banking. Mobile penetration is excellent in our country and it is increasing day by day. Why not Indian banks take initiative to  make it convenient to do daily transactions through mobile phone and thus we could be having a trail and consequently we can bring consumer court to regulate this petty transactions.

 

The need of the hour is to attack this incessant price rise habit by all corner : Government to monitor  the supply & prices of goods and services & consumer court to sharpen there teeth. Above all authorities to make it clear in no uncertain terms that they are lurking behind to  maintain price stability.

 

Investors : Tap the opportunity...

 

INR has been continue to depreciating against USD and other major currencies. Equity markets was also volatile and scores of stocks touched year low or all time low.  This is what creates investment opportunity to struck gold in the haystack.

 

It is time when most of the investors are fearful about uncertainty associated with growth in the economy, indecisive government and impending elections. However, if you notice we have overcome these and other uncertainties over so many years and here we are as top 5 global economy of the world. No doubt, head winds are there, but we shall surmount them in long term.

 

Another thought which investors would appreciate that equity investment held for more than one year is exempted from capital gain tax while less than that attract higher tax rate. Thus from tax perspective also, it makes sense to invest for long term.

 

Well, now it makes eminent sense to start investing systematically to take advantage as valuation is now getting attractive. There are two ways to capture this event:

 

1. Simple and straight forward method is to invest in index equity mutual funds. This is cheapest and best way to own top business of the country. In addition, you can eliminate the bias of fund manager if you choose to invest in actively managed equity fund. Pl exercise caution while investing in Sector / Theme based equity mutual fund as they are flavor of season and you should be alert when to enter and exit.

 

2. Direct invest in Equities : Here one has to study companies in terms of business model, competitiveness of the business, corporate governance etc. and top of that Valuation. One can develop these skills by mastering reading annual report of the company and other available resources in public. Thus companies available cheaper would be candidate for investment.

 

Happy Investing ...

 

Indian Rupee : Humpty Dumpty had a great fall....and opportunity for investors to profit by..

Market will remain irrational longer than what you think. This is what always happen across the world and markets. Indian Rupee was remarkably calm despite persistent high inflation differential with major trading partners as well as record high Current Account Deficit (CAD) for fairly large period.  

INR was waiting for catalyst to onset the correction of the value of the INR against major currencies like USD. It was Ben Bernanke, chairman of US Central Bank in it's testimony, who has hinted possible withdrawal of massive liquidity in the light of strength gained by US economy. This has prompted investors to withdraw funds from emerging markets. India has also witnessed withdrawal by Fixed Income investors and this has put pressure on INR to depreciate.

One of the major driver for higher CAD is import of gold. RBI and Government of India (GOI) have taken measures to reduce demand for gold by introducing several measures which will take a while to have a meaningful impact.  This along with strength in the US economy is presenting a strong case for the investment in index funds of the USA, as highlighted in the last week blog.

There would be two ways to benefit. The possible annual depreciation of INR against USD by 5% due to inflation differential in two countries. This along with expected increase in stock prices of USA as economy is piaking up. These two components will spice up your performance. This should be the part of asset allocation and recommend to have a weight of 10-15% of your portfolio.

Alternative investment to Gold to generate Real Return...

 

We Indians are obsessed with gold with so much so that this has been creating additional demand of USD and thus putting additional pressure on Current Account Deficit (CAD).  The reasons are not far to see... Persistent high retail inflation for last 3-4 years, dismal performance of equities and not every one would be lucky in investment in cumbersome real estate. Investors just jump on the gold wagon to intuitively capitalise on trend of strengthening of USD against INR as well as global bull run in gold prices. Moreover it is easy to invest and hold gold on top of nobody is asking you to declare Permanent Account Number (PAN). All this has made Gold as a block buster product during these years as a preferred choice of investment.

 

However, gold as a hedge of uncertainty is now loosing its appeal. USA is now stabilising as reflected in latest data like employment generation & various points related to housing. Additionally, Euro zone will also be stabilising on the back of commitments of ECB " Whatever it takes". Japan has also embarked on the ambitious program to bring back the growth after more than lost decade. All this is going to bring down uncertainty associated with global growth. Thus Gold is going to loose its appeal of safe heaven investment.

 

Now, we have an investment theme of  persistent high retail inflation in India and consequently expected strengthening of USD against INR. This couple with reflation of the USA present an excellent opportunity to invest in the index funds of the US equities  to capture these twin themes. 

 

There are several mutual funds which are offering these products. One should take caution to invest only in Index products linked to Dow Jones or S&P 500. This is an ideal way to take exposure to US equities while eliminating fund manager's bias in an actively managed funds. In addition, index funds are least expensive in comparison to other actively managed funds.

 

Last but not least, it is paramount to keep an eye on the development in financial markets to track inflection point and performance of the fund. This will ensure to take home decent return.

 

Tracking of performance can be done by reading business dailies on regular basis as well as making oneself literate about factors and trends which moves the market..