Indian Economy & Inflation - 2019

Continuing on my earlier article  http://quantfinanceindia.blogspot.com/2016/05/real-interest-rates-india-vs-brazil.html.

Inflation is a necessary evil which has been trending lower from last few years, thanks to the work done by RBI & surplus agri production. Lower inflation has given the space for MPC to cut rates further & provide necessary incentive (reduced cost of capital) for businesses to increase investment.

Reduced inflation, is that causing slowdown?

Taking a leaf from RaghuRam Rajan's book, In the high inflation times - real interest rates stays negative which makes it easy for corporate to post growth in their EPS because increase in prices (read inflation) will be more than the interest they pay.

This takes economy to exuberance which is not good because the purchasing power of households reduces everyday and RBI has no option but to intervene and bring it(inflation) back to level which does not adversely impact households and bring stability to other macro economic indicators like currency rate.

By way of RBI actions, Once inflation start coming down - businesses will not be able to increase (much) the price of their goods that they use to do earlier, hence they don't have the incentive to borrow more & produce more since they will not able to make delta (increased profit - borrowing cost) from increased prices.

This reduces the rate at which profit grows and gives a feeling that there is a slowdown however this is nothing but a temporary adjustment which is required for the betterment of all stakeholders!

Other factors??

Younger generation is not interested in buying fixed assets and are happy to live with less strings attached life which technology is helping them to achieve.

More and more people are getting concerned about Environment and very soon industries which impact environment will not be there anymore or will have lesser customers!

De Monetization & Inflation - II

It has been one week since my last post, Demonetization has gone to next phase where 2000 notes are now available from ATMs (Metros cities at least) and lines have started reducing in certain places - saw Bhopal in one of the news channel yesterday.

News of blacks money caught in various states are coming everyday and experts are commenting that there could be 2 Lakh crore rupees which may not come to market at all, leading to substantial reduction in M0 and then M3. Inflation is definitely going to come down and there are other changes that we may soon start to notice -

• Pick up in Non Cash Transactions - E-Wallet/Debit/Credit/On line payments will see jump and more business.
• Banks will have more cash which will lead to reduction in interest rates/deposit rates.
• Reduced inflation will also make good case for reduction in interest rates.
• Credit off take will pick up since Banks have to lend to make up for the increased cost by way of interest that they have to pay on deposits.
• Tax compliance shall improve as people will fear further such moves by Govt. Increased tax collection may reduce  tax rates and will also improve overall balance sheet of Govt.

One major disadvantage will be impact on business for next 2 months or so since there will be liquidity crunch in the market however there are lot of business who have started accepting Online/E-Wallet Payments.

Financial Planing - Goal Realization (Excel Model)

All of us need money for our future requirements; some people also call it financial goals. The main question that lies in our mind is that “How much shall I invest”?

I have tried to simplify the whole investment procedure for you so you can do it on your own

Three steps to investing –

1.       Why do you want to invest?  (Goal – Child Education, Buying car etc,  Time – when)

2.       What is your risk appetite? (How much risk you can take)

3.       Enter your data in below excel template and get the amount that you should be investing on monthly/ Yearly basis

Download the template from below link 
https://drive.google.com/file/d/0B6PCLqvOx_9JZWc3MF9NRWFIanc/edit?usp=sharing

Note – Please enter inputs in highlighted fields, Result will come in GREEN color cells

Definitions - of terms used in Excel template

Goal                 It is the present value of the cause you investing for. If you are investing for say a hatchback car, then the goal may be 5,00,000

Time                How much time you have to invest by when you want to realize your goal

Assumed inflation Rate

I have used 7% as inflation rate; you can change the number if required. However 7% is reasonable assumption used across in financial industry

ROR (Rate of Return)

 It will depend on the investment you are making.

·         FI – for FD or any other fixed income you can directly enter the rate of return

·         EQ – depending upon the mutual funds you have chose, you can enter the ROR number. You can look at funds past performance to decide how much return you should be expecting