Economic Indicators that Will Affect Your Finances in 2021

Apr 10, 2021

Listen to Economic Indicators that Will Affect Your Finances in 2021

00:00 00:00

India is witnessing a daily rise in coronavirus cases, resulting in partial lockdowns in several parts of the country and the closure of non-essentials establishments is affecting various businesses that are yet to recover from the previous losses. The second wave of COVID-19 threatens to derail India's already fragile economic recovery.

One of the reasons for the surge in cases could be the Mahakumbh mela and the ongoing elections with political rallies in Assam and West Bengal. These events increased the possibility of spread; as many individuals discarded the basic norms of maintaining social distancing and wearing a mask.

The restrictions imposed to restrain the second wave have prolonged the hardships of the businesses trying to survive and it will disrupt supply chains. The recent surge in cases, rise in oil, fuel and non-oil commodity prices and the financial market volatility may impart a downside risk to the path of economic recovery.

However, the finance ministry's report on 5th April has exhibited that the second phase of vaccination drive began on 1st March 2021. It further added, "As the vaccination drive continuously upscales in India and guided by the learnings of India's successful management of pandemic during its first wave, India is now well armed to combat any downside risk posed by the recent surge in COVID-19 cases." After the end of a challenging FY2020-21, India is now on the path to become better and self-reliant in FY2021-22.

(Image Source: www.freepik.com)
 

Notably, these various economic factors and events have driven the attention of many investors towards it, as they influence the markets performance and create an impact on your financial plans whether they are long-term or short-term goals.

Some economic indicators like inflation, exchange rate changes have implication on your finances directly, while GDP and others give you a sense of where the economy is headed so, you can make informed financial decisions.

Therefore, it is essential to keep a close eye on the economic indicators and their developments to improve your financial well-being. Here are few economic indicators and how they could impact your finances in 2021:

1. Gross Domestic Product (GDP)

Gross domestic product (GDP) measures the total output of the economy for a given period. India's GDP contracted sharply for Q1FY2020-21 at -23.9% amid the COVID-19 pandemic. For Q2FY2020-21, the contraction was lower at -7.3% as the government gradually lifted lockdown restrictions. Further, as the government opened more economic activities in phases, the GDP of India exhibited a growth of 0.4% (Y-o-Y) in Q3 of FY2020-21.

Graph 1: India's GDP growth rate (%) 3Y data

(Source: www.tradingeconomics.com)
 

The International Monetary Fund (IMF) forecasted India's GDP growth at 12.5% in FY2021-22, despite the fact that a rise in the COVID-19 spread might challenge the economic recovery. "Even with high uncertainty about the path of the pandemic, a way out of this health and economic crisis is increasingly visible," said the IMF chief economist Gita Gopinath in the latest World Economic Outlook report.

The RBI governor while unveiling the bi-monthly monetary policy in February 2021 said, "The Indian economy is positioned to move in only one direction and that is upwards." The Union Budget 2021-22 has provided several government measures for revival of various sectors and the vaccination drive is projected to provide a decline in the spread and restoration of domestic demand, functioning of contact-intensive services, etc.

Considering the rise in coronavirus cases and lockdown restrictions that are imposed, the World Bank estimated a range for India's economic growth from 7.5% to 12.5% in FY2021-22. The Organisation for Economic Co-Operation and Development (OECD) also expects India's economy to grow and exhibit a faster recovery to reclaim India's position of 'fastest-growing economy'. It all depends on the proceeds of vaccination drive and how India combats the second wave of virus.

GDP enables you as an investor to analyse the economic performance of the country if it's contracting or expanding and make suitable financial decisions. If the economy is contracting it means your will receive lower returns and there will be a decline in stock prices.

However, this does not indicate a lack investment opportunities during this phase because stocks in the defensive sectors such as Pharma, IT, and Consumption do well when the economy is on a downward trend. On the other hand, stocks in the cyclical sectors such as Bank, Consumer Durable, Auto, etc. perform better when the economy is on recovery/growth stage.

You may consider diversifying your investment towards value funds to generate stable returns in times of economic contraction.

2. Inflation

As a result of the continuing fluctuations in economic activity, inflation has risen, with increases in oil prices and LPG rates, food prices, and transportation costs (due to high fuel prices).

The government on 31st March, 2021 retained the inflation target of monetary policy framework at 4% with range of the tolerance level as lower 2% and upper 6% for the next five years (i.e. April 2021 - March 2026); it was similarly set five years ago in 2016 in consultation with Reserve Bank of India (RBI).

RBI has considered various factors such as food inflation, recent easing of crude oil prices due to lack of demand, the combination of high international commodity prices and logistics cost that will lift input price pressures across manufacturing and services, resulting in Consumer Price Index (CPI) inflation forecast.

RBI on April 07, 2021 announced the revised projection for CPI inflation, which is 5% in Q4 of FY2020-21, 5.2% in Q1FY2021-22, 5.2% in Q2FY2021-22, 4.4% in Q3FY2021-22 and 5.1% in Q4 of FY2021-22 with risks broadly balanced.

Rising inflation decreases the value of your hard-earned money over the years. If you want to clock an appealing real rate of return that could counter inflation, investing in a diversified portfolio of equity mutual funds could be an ideal bet.

3. RBI Monetary Policy

On Wednesday 7thApril 2021, RBI Governor Shaktikanta Das announced that the Monetary Policy Committee (MPC) of the RBI has voted unanimously to leave the policy rates unchanged with repo rate at 4%, marginal standing facility (MSF) rate and bank rate at 4.25% and reverse repo at 3.35%.

The MPC in the press release mentioned, "It is unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward."

According to RBI, currently the major focus should be on containing the spread of the virus and enhancing economic growth. This decision to retain the policy rates is made as the economy faces resurgence of coronavirus cases and to improve the investment climate. In order to maintain the economic revival journey, RBI may not revise the policy rates soon; the revision of rates might be expected towards the end of FY2021-22.

Policy rates assist you in determining at what rates the RBI lends or borrows from banks as well as if banks will reduce or increase interest rates on loans and fixed income instruments. While low interest rate mean you have to pay lower amount by way of interest on your car loan, home loan, personal loan, etc. it also means that you will earn lower interest on you bank deposits and other fixed income instruments. With interest rates expected to rise from its multi-year lows, your monthly EMI may also go up and impact your monthly budget.

4. Exchange rates

Exchange rate fluctuations do not directly impact you, but their indirect effects are prevalent, including changes in the price of imported products and domestic goods made from imported raw materials, as well as job market and investment performance. It also impacts the value of remittances made from and to a particular country.

India is a large-scale importer of crude oil and changes in currency rates affects the oil prices that comes down to affecting your finances whether business or personal with increase in oil and fuel prices.

Currently, the rupee is expected to slightly weaken, due to surge in infections and slowdown in economic recovery, any such uncertainties create risk of corrections in the currency rates.

If you are travelling abroad for vacation, business, or studies, the rupee's depreciation will increase your costs. Changes in currency rates can have an effect on your finances in a variety of ways, including investments made in overseas investment avenues such as overseas fund of fund scheme in mutual funds.

You can mitigate the impact of depreciation in domestic currency by diversifying investments across geographies that have low correlation with the domestic market, preferably through a well-managed overseas mutual fund.

5. Market Indices

It is often said that equity market indices are true representatives of a country's current economic situation, but in reality indices are always forward-looking. Remember that any rise or fall in the market indices such as Nifty and S&P BSE Sensex has a direct impact on your equity-oriented investments.

The spike in infections has turned the Indian equity markets nervous; many investors are currently hesitant towards investing and are cautious about their existing investments. Despite the rise in infections and imposition of lockdown-like restrictions, equity markets continue to trade at higher valuations. But if the economic recovery does not take place expected, the markets may witness a correction. A lot now depends on the progress of vaccination drive, how fast the second wave of infections is curbed, revival in demand in the aftermath, and improvement in corporate earnings.

This indicator will assist you in making sound investment decisions and comprehending the overall market outlook in view of the economy. After analysing the market indices, you will need to make relevant changes to your equity investments.

In case, you have long-term investments in diversified equity funds, stay put instead of redeeming the units during a market crash or high volatility; the markets will bounce back in the long run. Similarly, during market highs you may have to trim your equity exposure to ensure that it aligns with your asset allocation plan.

Therefore, take the time to understand the mentioned economic indicators and observe them closely to make sound financial decisions for your financial well-being. It is also an important step to first enhance your financial awareness to understand the impact of economic indicators on your finances and this will result in better financial management in the future.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst

 

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