More on Inflation.. vicious circle is firmly established..

Well, daily in every walk of life, we are witnessing ever increasing spiral of inflation. You go to barber shop, grocery store or hire a cab, it is certain that very next time you will be incurring some thing more for the same quantity and service. What are the reasons behind such persisting phenomenon for last 5 years.

 

First and foremost, governments at both Central and State level have failed to recognize or rather overlooked the persisting high consumer inflation. They have done nothing to improve the supply which is being used by average Indians on daily basis. This has emboldened the whole-sellers and retailers to increase the price under any pretext like increase in petrol price ( though delivery vans use only diesel which is increased occasionally) or destruction of crop due to excess rains which should be always exaggerated. Absence of any government action on this front has left both producer and consumer poorer day by day. In fact, quality is now a days pretty suspicious despite paying higher and higher prices, which is further undermining the interest of the consumers.

 

Second consumer has chose to become mute spectator. They refused to raise there voice against price rise and quality of the product and services. Gone are the days when rise in the price of onions would have brought down the government. We have lost the sensitivity to the persistent high inflation. If we ourselves are unwilling to understand the long term implication of indirect tax on our income then we have no one to blame which is reducing our purchasing power day by day.

 

Let us understand, how we can overcome such situation which has been persisting for long period of time:

 

1. Raise your voice and concerns at all appropriate level. Be it your cab who is refusing to pay you change or a grocer who ask you to buy unwanted stuff for the balance amount.

 

2. Election is around so let us exercise our right cautiously and try and elect who can pay attention to this spiraling price rise.

 

3. Now a days people hardly carry coins. In such environment, every thing is getting to rounded off to nearest multiple of Rs.10.00, which is also a kind of stealth inflation while reducing your purchasing power. Credit/ debit card can help in such situations so that one can pay correctly.

 

Remember, money saved is money earned...

 

 

 

 

Collateral Damage : Indian Bond Yield...

 

 

Indian bond yield has went up across the yield curve by 50 bps during this week in response to de-facto tightening by RBI to shore up the value of INR against foreign currencies.  RBI has capped the funds available at Repo Rate to INR 750 billion while additional funds will be available at 300 bps above Repo Rate. This will help curtail the speculation of going long on foreign currency against INR as holding foreign currency become expensive. In addition, hopefully, higher interest rates will lure back the foreign debt investors, which have been selling from late May 2013.  

 

The key question now, a la 1998 & 2001, will RBI / Government will follow up with the measures like issuance of offshore bonds to augment its foreign currency reserves. The key difference between this time and the similar events in the past is that currently, we are facing real high demand for foreign currency for variety of reasons like maturing short term foreign loans in the current financial year, falling exports & stagnant import etc. Persistent higher international prices and large imports of gold has created additional demand for foreign currency to import.

 

Equities remain resilient though earning would be under pressure, going forward, for the sectors which are already suffering from high debt overhang and slowing economy. Sectors like PSU banks, Infrastructure, Metal, Telecom, Hotel etc. which are already under various economic pressure will now be facing higher interest burden as well if the current measure persist for long. Further, lots of companies have taken debt denominated in the foreign currencies which is as high as 70% of the outstanding debt, will also feel heat of additional burden on account of strengthening in foreign currency. This will be mitigated to the extent of hedging done for debt in foreign currency.  

 

As always thoughtful selection of asset allocation and careful investment will yield handsome return in the long term. One should make use of these inflection points judiciously to  build long term nest egg. It is like we have faced these kind of situations in last decade and a half thrice and lo & behold.. we are still growing and doing something right..

 

Do not hesitate to continue to invest through Systematic Investment Plan ( SIP), if you already have or start new plan to take advantage of the situation as things are now available much cheaper now. In fact it is advisable to invest one time lump sum to take advantage of lower valuation currently available in the market.  In terms of equity mutual funds route, always stick to the diversified mutual fund scheme or low cost  Index equity fund.

 

 

 

 

 

 

 

 

 

 

Indian Rupee.. the game changer..

 

Well, our economic fortunes are tied with the value of the Indian Rupee (INR) against the currencies of the major developed market viz. USD/ Euro/ Pound etc. We got  immensely benefitted with the onset of Y2K projects of software companies at the turn of the millennium, which had opened altogether new avenue of earning the foreign exchange. We continue to enjoy this benefit till the global financial crisis erupted in 2007. Alas, though US, the epicenter of the crisis is now stabilizing, yet we are sinking into another one.

 

All these years since 2007, we are now facing problems which we were ignoring during hey days. Actually we could not anticipate that our export are dependent on external demand while imports are mostly inelastic to local demand. Further, due to persistent higher inflation and uncertainty associated with financial and real economy, citizens decided to move into physical assets like Gold and Real Estate.  This has boosted import of Gold manifold over the years which has required foreign exchange. In fact, our foreign exchange reserve did not grow in last six years. Anecdotally, demand for Gold was further fuelled due to investment of unaccounted funds. In addition, attractiveness of the gold was magnified as it was appreciating year after year since global financial barring last one year. What more one can want from gold: easy to store with steady appreciation.

 

All this has precipitated into demand for USD not commensurate with enough supply. Market was waiting for a catalyst to let INR reach to its fundamental level. This moment has arrived when  US Federal Reserve gave a whiff of withdrawal of quantitative easing as US economy is strengthening. Leveraged investors across the world started deleveraging bonds and thus outflows from emerging markets has started. This has created demand for foreign currency in the system which was already short of supply and prompted INR to touch life time low in line with other emerging market currencies.

 

The worrisome part is depreciation of INR witnessed when growth in the economy is at low point. This will put further pressure in terms of higher fiscal and trade deficit as well as higher inflation. This if we combine with policy paralysis prevailing in recent years, cast a doubt over any imminent recover in the economy.

 

 

 

Indian Economy.. are we going the way to Hindu rate of growth..

Looks like we are getting into vicious circle of ailing economic growth, persistent high consumer inflation and increasing joblessness. Since the onset of global financial crisis in 2007-08, we are unable to stand on our feet. Though we recover once global economy stabilized at lower level, but during the last two years, due to policy paralysis, we are unable to convert adversity into opportunity.

 

First, government has failed miserably in augmenting supply to rein in consumer price inflation. India badly needs reform in agriculture, farm produce and distribution etc. This will benefit both farmers and consumers. It is high time that we should witness another green revolution to make ourselves self sufficient. This is all the more important now in the light of recently announced Food Security Bill to provide food to 80% of the population at abysmally lower prices. This will involve procurement and storing of various farm produce. This may further boost price rise. We already have very poor record of storage of grains. Can we do something to improve that at the outset..

 

In addition, due to the lack to reform, malpractices, fear in bureaucracy and uncertainty in India, domestic investors chose to invest outside the country. For example Tata chose to buy Corus and JLR. Aditya Birla has bought over Novelis. These are few illustrative example which indicates the mindset of promoters.  

 

In the middle of the 1990-2000, we were growing at the rate of 5%. Already, we are cloaking almost similar growth. There are reasons to believe, that we may witness same growth rate for considerable future as there are hardly any measures taken . In fact the worrisome fact is that neither government nor corporate world is recognizing this fact. In the absence of action plan, only way we can grow above Hindu rate of growth is to export our way on the back of recovery of global. However, this is not a panacea of our all problems.

 

Government and RBI has to act decisively and swiftly to manage the current foreign exchange crisis on the back of large current account deficit. Otherwise, it will inflict permanent scar on the Indian economy..

 

Time is ticking fast.. Let us have resolve and conviction to reclaim our glory...