How will the RBI Monetary Policy Affect Your Borrowings And Investments

As expected, the RBI reduced policy rates at its first bi-monthly monetary policy meeting for the Financial Year (FY) 2016-17. While the market’s anticipations and analysts’ estimates were running wild with the consensus building around a minimum of 50 bps of a rate cut, the actual rate cut came in at 25 bps. One basis point is a hundredth of a percent.

Monetary Policy Action at Glance:

• RBI reduced the policy repo rate from 6.75% to 6.50%
• It narrowed the policy rate corridor from 100 bps to 50 bps by cutting the MSF rate by 75bps and increasing the reverse repo rate by 25 basis points,
• Reverse repo is adjusted to 6.0% and Marginal Standing Facility (MSF) to 7.0%
• The central bank lowered the minimum daily maintenance of the Cash Reserve Ratio (CRR) from 95% of the requirement to 90% with effect from the fortnight beginning April 16, 2016.
• CRR is unchanged at 4.0%

The RBI introduced many changes to the liquidity management framework as well as bringing in new measures to strengthen the banking structure, broadening and deepening financial markets while extending the reach of financial services to all. The central bank’s assessment of growth, inflation and foreign exchange reserves has also been crucial.

In short, the first bi-monthly monetary policy may look disappointing if we focus primarily on 25 bps of a rate cut. However, if you look at the broader picture, the monetary policy has been extremely effective and may have a long-term positive impact on your borrowings, savings, and investments. Let’s have a look all these aspects one by one.

Impact on borrowers...
While speaking to media, Governor of RBI, Dr. Raghuram Rajan suggested that a move of lowering policy rates by 25bps shouldn’t be viewed in isolation. Here is what he stated, “Don't look at the monetary policy review as 25 bps (cut alone). Look at the composite of measures (marginal cost of funding-based lending rate methods effective April 1), they all add up. Borrowing rates are coming down significantly in the economy.”

With MCLR coming into effect, the borrowing rates have come down by about 50bps overnight. As the cost of funds will now be adjusted frequently, which is the critical component of base rate calculation, loans may get cheaper. A few large banks have already announced their MCLR rates, which are a tad lower than their base rates. For new borrowers, the loan pricing will be done at MCLR. However, the existing borrowers whose loans are linked to the base rate will have to voluntarily switch to the new regime. Before you take any such step, bear in mind that MCLR rates would change quite frequently. Once you move from base rates to MCLR, you may not get a chance to switch back. Falling interest rates may help but be prepared for the upswing too.

PersonalFN suggests comparing stats before you switch. For minor gains, it may not make much sense to change. Let’s not forget the rising interest rate scenario, changes in the MCLR rate would be much more lucid.

How will the RBI monetary policy action impact your investments?
Apart from the central bank’s policy action, its assessment and projections affect the movement of equity as well as debt markets. The RBI expects retail inflation measured by the movement of Consumer Price Index (CPI) to slow up and hover around 5% in FY 2016-17. It sees the implementation of One Rank One Pension (OROP) and 7th Central Pay Commission. The RBI is also watchful to the upside risk emerging from the deficient monsoon. The Central Bank expects that the GDP growth will strengthen in 2016-17 assuming the positive impact of the Government’s actions, and hopefully a healthier monsoon.

Post the policy announcement, equity markets fell sharply while bond markets reacted positively to the policy action. As the RBI has taken a slew of work to improve the durable liquidity position in the system, debt markets welcomed the predictability in cash management. The RBI’s systematic approach in dealing on the Forex front also instilled confidence. Bond markets, as well as equity markets, may benefit as the lower interest rates start making the real impact on balance sheets of corporate as well as those of households.

Changes In Relationship Status And Its Impact On Finances

Everyone looks for companionship, intimacy, and friendship in a marriage, especially when they are made in heaven.

India has always been conservative towards discussing love and relationships. Life was a lot less convenient earlier and marriage wasn’t discussed openly. The elders in the family chose the groom who best suited the family’s virtues, sadly, their choice wasn’t always right. Dowry, female infanticide, and a myopic outlook towards the role of women plagued society. Divorce was frowned upon and many couples stayed together fearing society’s backlash. “Log kya sochenge” (what would people think) was “the” concern of many married couples that forced them to stay in an un-happy marriages.

Still, India has come a long way. Parents openly discuss marriage with their children, even giving them the liberty to choose their life partner. Parents are embracing “live-in” relationships too. Expectations are discussed openly with one’s beau. Career is a top priority for both and the man is expected to help in doing the dishes and the laundry. Society is evolving and the stereotypical roles are changing.

However, an often neglected part in the relationship is a discussion about “finances”. It is important to discuss the topic openly with your man. Women face specific issues like-social prejudices, longevity, gender related illnesses, pregnancy, caring for ageing parents or spouses, greater health care costs, etc. that require special consideration.

If you are planning to tie the knot soon, here are some simple actionable points to kick start your money discussion:

• Understand his money outlook: Understand what motivates your spouse about money. Why did he decide to invest in a particular scheme? Is financial security on top of his agenda? Or is he an active investor in the stock market? Share your views and aspirations with him too—this way he realizes your attitude and outlook towards money.
  
  
• Similarly, discuss what you owe—debt is a major cause for a relationship turning sour. Avoid jumping to conclusions. Understand the reason for him borrowing money—he could have borrowed to buy a house or for education, etc.
  
  
• What are your financial goals:Make sure you write down your financial goals and chalk out a road map that will help you achieve them. Financial goals help you make the right use of your money. Make sure you aren’t too conservative with your investments for long term financial goals.
  
  
• Most couples invest in their individual capacity. This creates a lot of problems on death or incapacity of the spouse. Wherever possible, invest jointly and add a nominee.
  
  
• How do you plan to share the expenses: You may open a joint account wherein both the partners would proportionately credit a part of their salary to meet the daily expenses
  
  

PersonalFN believes that owning a credit card is not a bad thing as long as you know the means to service your dues. As Dave Ramsey puts it, “Personal Finance is about 80% behavior and about 20% head knowledge”. There’s an old adage for financial discipline, “Live within your means” – follow it thoroughly.

However, life isn’t always black and white—there are grey shades to it too. There could be circumstances that force you to move on in life and part ways with your spouse.

In the West, couples get into a “pre-nuptial” agreement wherein the future partners disclose all their financial assets (including liabilities) and agree the terms of distribution of assets, including maintenance in case of divorce.

However, such agreements are neither legal nor valid under the marriage laws of our country. The judiciary doesn’t consider marriage as a contract. A marriage is treated as a religious bond between the husband and wife and pre-nuptial agreements have not found social acceptance.

Parting ways is never easy. It takes a toll on life and career, leading to a lot of stress. An amicable divorce is a prudent decision both financially and emotionally. Seek professional help to navigate through the rigmarole of the law.

From a personal finance perspective:

• Make a list of your savings and transfer money from joint accounts to individual accounts,
  
  
• Assess the family debt and yours as an individual,
  
  
• Calculate the cost of running the house alone,
  
  
• Determine where you will be living after the separation,
  
  
• Avoid any major purchases till you settle down and
  
  
• Reevaluate your financial goals and restructure your financial plan
  
  

However, marriage isn’t the only relationship status that Indian society is reforming. We are experiencing a new form of cohabitation—live-in relationships. Metros, in the country are open to residing with a partner without tying the knot.

Although the Hindu Marriage Act, 1955 or any other statutory law does not recognize a live-in relationship, the Protection of Women from Domestic Violence Act 2005 provides for the protection and maintenance, thereby granting the right of alimony to an aggrieved live-in partner. There are no specific laws to define the status of live-in relationships in India, and hence the Courts have stepped forward to clarify their point of view. Having taken the view of a man and a woman live together as husband and wife for a long term, the law will presume they were legally married unless proved contrary. According to the Courts, such cohabitation may be immoral to the conservative Indian society but it isn’t illegal in the eyes of the law.

If you are in a live-in relationship, here are some personal finance tips:

• Don’t commingle your finances
  
  
• Don’t assign your life insurance policy to your partner—once the policy is assigned it will be difficult to reassign it, in case you move out of the relationship
  
  
• Buy separate health insurance plans
  
  
• Share the expenses on rational basis proportionate to the earnings of your partner
  
  
• Without any law in the country recognizing a live-in relationship, succession planning is the most difficult part for live-in couples. Making a proper Will with the help of a legal professional would provide respite to the partners.
  
  

Needless to say, it is important for all women - married, single, separated, widowed or divorced to be financially independent. However, remember that financial independence cannot be regarded as the same as financial security. A monthly pay cheque in your bank account alone cannot render you capable of meeting all your financial goals. How you plan and manage your finances will result in the fruition of goals later in life.

In the words of Ms. Kathleen Murphy, President, Fidelity Personal Investing, “In order to control your future and live the dreams you have earned, you also have to control your financial future.”

Disclaimer

Disclaimer : All information given here is for information purpose only. Users are advised to rely on their own judgement or investment advisor when making investment decisions. This blog is not liable and take no responsibility for any loss or profit arising out of such decisions being made by anyone acting on such advice.

Equity Market Update - March 2016

 Equity Market Update - March 2016

Equity markets rebounded globally in March after correcting for three months in a row.
FII’s have bought $3.2bn in equities in India during March. This is interesting as FII’s had sold $7.1bn of Indian equities in FY16 till February. The Rupee appreciated 3.2% versus the USD in March. Net outflow in domestic Equity mutual funds in the month of March 2016 was Rs 3,206 crs. Total inflows in FY16 have been close to Rs. 68,000 crs.
In our opinion therefore, there is merit in increasing allocation to equities (for those with a medium to long term view) and to stay invested.

Debt Market Update - March 2016

During the month of March 2016 yield on the new 10-year benchmark (7.59% GoI 2026) ended the month at 7.46% down by 16 bps over the previous month end. The yield on old 10-year benchmark Government bond (7.72% GoI 2025) ended at 7.69% down by 10 bps for the month. The yield on 10-year AAA Corporate Bond ended the month at 8.26% as against 8.62% at the end of February 2016. Thus, corporate bond spreads during the month narrowed to 66 bps as against 85 bps in the previous month.

Liquidity conditions continued to remain negative during the month of March 2016. As against ~Rs.1,61,350 crs of average liquidity net injected by RBI during the month of February through various sources (Liquidity Adjustment Facility, export refinance, marginal standing facility and term repos/reverse repos), ~Rs.1,96,503 crs of liquidity was net injected by RBI during the month of March. The overnight rate ended at 9%, as against 7.05% at end February 2016.

The INR appreciated to 66.36 against the US dollar as compared to 68.42 at the end of previous month. The net FII investment in equities & debt was an inflow of US$ 6.09 billion in March 2016 against an outflow of US$ 2.8 billion in February 2016.

The annual rate of retail inflation, CPI came in at ~5.2% YoY in February 2016, down from 5.7% in January 2016 largely due to moderation in food prices. However, wholesale inflation continued to remain in negative territory as WPI stood at -0.91% (provisional) for the month of February, 2016 (over January, 2015) as compared to -0.90% for the previous month and -2.17% during the corresponding month of the previous year.

In the credit policy review of April 2016, RBI cut the repo rate by 25 bps from 6.75% to 6.5% and in an unexpected move narrowed the policy rate corridor from +/-100 bps to +/- 50 bps. In a major development RBI also announced changes in its liquidity framework wherein systemic liquidity would be progressively improved from a deficit of 1% of Net Demand Time Liabilities (NDTL) to a position closer to neutral.


Outlook

While the repo rate cut by RBI was along expected lines, the proposed changes in liquidity framework are a significant policy regime shift which should have material positive impact on yields going forward.

RBI has reaffirmed that the stance of monetary policy will remain accommodative. The introduction of marginal cost of funds based lending rate (MCLR), reduction in small savings rates and the changes in liquidity management framework will improve monetary policy transmission and magnify the impact of rate cut. Additionally, low inflation and benign inflation outlook, falling fiscal deficit and low Current Account Deficit (CAD) are all supportive of lower yields.

As highlighted repeatedly over the past several months or so, we believe there is merit in adding duration to one’s fixed income portfolio.

Source for various data points: Bloomberg, Reuters, www.sebi.gov.in, www.rbi.org.in and Central Statistics Office (CSO).

Credit Policy Review - April 2016

In line with consensus expectations RBI cut the repo rate by 25 bps from 6.75% to 6.5% and in an unexpected move narrowed the policy rate corridor from +/-100 bps to +/- 50 bps. Thus the MSF (marginal standing facility) rate stands reduced to 7% while the reverse repo rate is adjusted to 6%. As per RBI a narrower corridor will ensure “finer alignment of the weighted average call rate with the repo rate.”

In a major development RBI announced changes in its liquidity framework wherein systemic liquidity would be progressively improved from a deficit of 1% of NDTL (Net demand and time liabilities) to a position closer to neutral. RBI also reduced the minimum daily maintenance of cash reserve ratio (CRR) from 95% of the requirement to 90% for the banks (keeping CRR unchanged) with effect from the fortnight beginning April 16, 2016.

The RBI kept its growth and inflation projections unchanged. It expects GVA (gross value added) growth to rise to 7.6% in FY17 (from 7.3% in FY16) with balanced risks and projects CPI inflation to trend towards the 5% target by March 2017.

“In its forward guidance, the RBI stated that “the stance of monetary policy will remain accommodative. The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up.”

Source: First Bi-monthly Policy Statement for the year 2016-17


Conclusion and Outlook

While the repo rate cut in the credit policy review was along expected lines, the proposed changes in liquidity framework are a significant policy regime shift which should have material positive impact on yields going forward.

RBI has reaffirmed that the stance of monetary policy will remain accommodative. It has emphasized that current and past rate cuts need to transmit to lending rates. The introduction of marginal cost of funds based lending rate (MCLR), reduction in small savings rates and the changes in liquidity management framework will improve monetary policy transmission and magnify the impact of the rate cut.

Common investing mistakes to avoid during bull markets

With the new NDA government coming to power, many investment experts believe that, India is on the threshold of a long term secular bull market. While it is certainly easier to make money in bull markets, it is also easy to make mistakes in bull markets. Mistakes costs investors money and therefore must be avoided. We should clarify that this article is addressed to investors. Here are eight common equity investing mistakes in bull markets.

• Trying to time investments at the start of a bull market:

  Retail investors wait too long trying to time the market. Most retail investors are not able to spot a bull market when it is taking off. When the market runs up significantly, retail investors realize that they have missed the bus. Timing the market is incredibly difficult. Even experienced professional investors often do not get their timing correct. Equity investing should be goal based, not timing based. Set investment goals and invest for the long term. Timing does not matter if you have a long time horizon.



• Ignoring asset allocation:

  In bull markets hot stocks and mutual funds are always in news. It is important to select great stocks or mutual funds to get higher returns. But investors do not realize that a much bigger portion of portfolio return is attributable to asset allocation and only small portion of returns can be attributed to stock or fund selection. For example, even if you select a great mutual fund that gives you 25% compounded annual returns, if 90% of your portfolio is invested in fixed income assets yielding 6% post tax returns, your overall portfolio returns is less than 7%. You should pay more attention to your asset allocation and consult with your financial adviser to get appropriate guidance on the right asset allocation mix.



• Adopting trading strategies in bull markets:

  Investors should understand the difference between trading and investing. Traders are usually professionals and aim to generate profit over a short time horizon, ranging from a day to a few weeks. Investors, on the other hand, aim to create wealth by investing over a long time horizon. Trading and investing require very different strategies. Retail investors in bull markets, seeing market rise sharply, switch to trading strategies. Investors may even be able to make decent intraday or positional trading profits in bull markets. But investors should not think that they are expert traders just because they have made trading profits. Trading is extremely technical in nature and requires considerable expertise and experience which most retail investors do not have. Investors should especially avoid taking leveraged positions using derivatives like futures and options because they can incur big financial losses, if the market or the stock moves in the opposite direction of their trade.



• Blindly investing in hot midcap tips:

  Midcap stocks get beaten more than large cap stocks in bear markets. Consequently some of these stocks rally sharply in bull markets, when valuations of large cap stocks seem stretched. Often in bull market rallies, midcap stocks outperform large cap stocks. But in case of a lot of midcap scrips, the up moves are essentially momentum moves and not backed by strong fundamentals. Picking quality midcap stocks requires considerable skills and experience. If you are not an expert stock picker, it is always advisable to invest in midcap funds instead of directly buying midcap stocks.



• Paying too much attention to monthly economic data:

  The media goes on overdrive over daily, monthly or quarterly economic data, be it exchange rate, index of industrial production (IIP), inflation statistics, CRR, repo rate etc. It is true that the market reacts to these numbers. But they are not relevant for long term investors. You should stick to your investment strategy and not react to these numbers. The best investment strategy is to get your asset allocation right, and invest in high quality stocks or mutual funds with great track record, and let their investment compound.



• Panicking in sharp corrections:

  In a bull market, stock prices rise sharply but they can also fall sharply. In a secular bull market, sometimes these corrections are prolonged and may last several days or weeks. Investors, who cannot handle volatility, cash out during market corrections. But by cashing out during bull market corrections, investors are compromising on their long term financial goals. Investors should remember that such corrections are always of shorter duration than the periods during which the market rise. Over the last 20 years, the market went through many sharp corrections and yet the Sensex is many times higher. Therefore investors should stay invested through the periods of volatility. Their investments will grow in value once the uptrend resumes.



• Turning off SIPs during a downturn:

  Successful investors have made money in the market by buying stocks when everyone else was selling. Retail investors often find it difficult to handle volatile markets and stop the Systematic Investment Plan payments during a market downturn. This is a mistake. SIPs enable the investors to buy equities at a low cost in market downturns. SIPs work on the principle of “Rupee cost averaging”. By investing a fixed amount, every month or at any other regular frequency you can buy more units when the prices are low and less units when the prices are high. SIPs ensure good return on your investment and help you meet your long term investment objectives.



• Hanging on to underperforming stocks or funds:

  While investors should have a long time horizon for their investment, they should make sure that they do not hang on to underperforming stocks or funds. Even if the investors have performed adequate diligence in selecting stocks or funds, it is possible that some stocks or funds may not perform well. Retail investors often hang on to underperforming stocks or funds, especially if they are making losses in these stocks or funds. Sometime investors buy additional units of underperforming stocks or funds, to average the purchase cost or NAV. While this strategy may sometimes work in trading, this is a wrong investing strategy. Investors should monitor their investments on a regular basis. If there are stocks or funds in your portfolio which are underperforming relative to the benchmark for 2 – 3 years, then you should exit from these stocks or funds, and switch to stocks or funds that have been performing well. Even if this entails booking losses, investors should not hesitate in exiting underperforming stocks or funds

Conclusion

Investors should avoid these common mistakes when investing in equities. Equities are essentially long term investments. By selecting good stocks or mutual funds, and remaining invested in them over a long period of time, investors can create wealth in the long term by leveraging benefits of compounding. There is always a lot of surround sound in the media with regards to equity markets. Investors should cancel the noise in the surround sound and stick to a disciplined approach to investing.

Disclaimer

Disclaimer : All information given here is for information purpose only. Users are advised to rely on their own judgement or investment advisor when making investment decisions. This blog is not liable and take no responsibility for any loss or profit arising out of such decisions being made by anyone acting on such advice.

How To Survive A Drought Of Quality Debt Funds?

Many parts of India are facing severe drought this year. In some regions, residential areas are getting municipal water supply only twice or thrice in a month. March is here, and it is going to be tough to sustain water supply for the next 2 ½ months until the monsoon. When there’s a scarcity of clean water supply, the only option people have is to switch to bottled water which is unaffordable to many. Those who cannot afford the expensive water have no alternative but to rely on tanker supplies. This is a cheaper alternative but you always have to deal with problems such as the higher proportion of dissolved salts or at times even contaminants. Of course, we are unsure about the source of the water, but questioning the level of hygiene seems insensible. How can we expect it to be pure? Some people do the smart thing they use bottled water for drinking purpose, and for other activities use water supplied by tankers and other sources. However, what would you do when even bottled water is impure?

Investors in debt mutual fund schemes might ask themselves similar questions very soon. The investment climate around them is horrifying. Companies are defaulting, banks are slashing interest rates on deposits (keeping the lending rates more or less unchanged) and, investing in insecure deposits is always risky. Good quality debt securities have become scary and assessing the risk has become demanding. Under such a scenario, many investors prefer to take the mutual fund route and invest in debt schemes. As the professionals manage the portfolios, investors believe that their hard earned money is in safe hands. However, startling revelations like the one is given below prove to be nasty surprises for them.

Is Government Making Pro-Employee Changes To EPF?

If you have not made any contribution to your Employee Provident Fund (EPF) account in last 36 months; there’s good news for you. The Government is still going to pay you interest on your balance in the account. This move will be effective from April 01, 2016.

UPA Government had discontinued the practice of paying interest on inoperative accounts from April 01, 2011thinking that it will discourage participants from opting out. There are close to 9 crore dormant accounts with a corpus of over Rs 32,000 crore. Employees' Provident Fund Organisation's (EPFO) manages around Rs 8.5 lakh crore.

Commenting on this news, the Labour Minister Bandaru Dattatreya said, “Now, we have decided to credit interest in inoperative accounts. There will not be any inoperative accounts.” This was a much-needed clarification, which will bring relief to those who change jobs. There’s always a possibility that a person turns his employment and moves to a company that doesn’t qualify to implement the provident fund scheme. In such a case, his account would go inoperative for no fault on his part.

A few more changes
The Government has worked out a proposal to alter the the minimum number of workers criterion for it being compulsory for companies to cover its employees under Employee Provident Fund Scheme. The number is expected to reduce from 20 to 10. As narrated by a senior Government official, such a move will provide social security to about 50 lakh more people working in the organized sector. With this step, total Assets under Management (AUM) of EPFO is expected to go up by Rs 20 lakh crore.

With an aim of providing more leeway to EPFO, the Government also increased the upper limit for investing in Sovereign Securities from 50% to 65%. This may enhance the quantum of investments in G-secs by about Rs 11,000 crore every year. This might provide depth to the Government Securities market.

Experts believe that all of the above changes would make the provident fund scheme more employee friendly and help enhance the social security net to people who are currently not covered. However, you should not depend entirely on Provident Fund for your retirement. Start building a kitty for your retirement from the time you earn your first salary.