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| September 16, 2016 |
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Impact 
The Ganesh festival celebrated across India with great gusto concluded yesterday. Lord Ganesha, a symbol of prosperity and wisdom, is a 'Vignahartha' -- one who is believed to remove all obstacles that inconvenience its devotees.
Inflation, a modern-day monster lately, has brought discomfiting times to the common man who aspires to live a comfortable life. The most common expectations are: a good job, peaceful life, and good financial standing, and good health. And it seems that God has answered the prayers of devotees this time.
The Consumer Price Index (CPI) inflation (which measured inflation at the retail level) came in at 5.05% in August 2016 (from 6.07% in the month before), being the lowest level this fiscal year. It seems the robust monsoon has started to show some positive impact on food prices, which is a primary factor responsible for the recent drop in inflation. As against the 7.79% and 8.35% experienced in June and July respectively, food price inflation has cooled down to 5.91% in August – thanks to the sharp deceleration in vegetable prices. The rate of inflation in the vegetables segment on a Year-On-Year (Y-O-Y) basis has dropped considerably to 1.02% in August from 14.06% in the month prior. Price of pulses has also been moderated, though this is still relatively high. Likewise, price on sugar, cereals, and animal protein products still remain persistently high.
Inflation mellowed
(Source: MOSPI, PersonalFN Research)
Other heads of inflation such as clothing and footwear (5.21%), housing (5.29%), fuel and light (2.49%), and other miscellaneous groups including health, education, and transportation have remained benign.
So, expectations for the rate cut are building up...
Mr Shaktikanta Das, Secretary in the Ministry of Finance, Department of Economic Affairs, in a media interview stated: "With regard to the rate cut, there is a direct relationship between the inflation figures and policy rates of the Reserve Bank. So, inflation has moderated as expected. I would, therefore, expect RBI to take this into consideration and take its call... I'm sure they will consider all the aspects and take a call." His statement carries weight, especially, considering that the Monetary Policy Committee (MPC) – which has a 3 member representation from Government and 3 from the RBI – will now set the course of the monetary policy going forward.
Weaker than expected industrial growth in July provides further backing to such demands. The Index of Industrial Production (IIP) has contracted by 2.4% in July. Manufacturing, which accounts for nearly 3/4th of the IIP has recorded a fall of 3.4% in July. So far in the financial year (i.e. between April 2016 and July 2016) the manufacturing growth has fallen at 1.4% while the overall industrial output has shrunk 0.2%. It is widely believed that the higher borrowing rates increase the interest burden on the corporate, which in turn delays the process of strengthening their balance sheets.
But here's why there may be no rate cut until December...
PersonalFN believes that the MPC headed by Dr Urjit Patel may prefer to wait for more clarity on price moderations. The MPC may wait for the actual data on food grain production in the Kharif season. Higher agricultural output, greater buffer of oilseeds and pulses may give the RBI the comfort it requires to lower policy rates. As reported by the Ministry of Water Resources, water storage level in 91 major reservoirs as on September 09, 2016 was 97% of the average of last 10 years. As compared to the levels reported last year on the day, this year's figures are 17% higher. Water level is an important indicator for forecasting the rabi crop output and also decides the vegetable prices for rest of the year.
Besides, RBI may try to assess the impact of the implementation of 7th pay commission, One Rank One Pension (OROP), and pace of monetary transmission through lower borrowing rates. Of late, banks have lowered deposit rates, but still seem reluctant to reduce lending rates. Considering all this, those expecting a rate cut will have to wait a little longer – most likely until December 09, 2016 -- when the MPC will announce the fifth bi-monthly monetary policy review. Therefore, the RBI may keep rates unchanged at the fourth bi-monthly monetary policy review scheduled on October 04, 2016.
It is believed the MPC is likely to be formed by the end of September. In order to keep consistency in the policy stance, the Government is likely to choose its representatives from within the Technical Advisory Committee (TAC) at RBI. The existing practice is that, the RBI Governor considers the opinion of the TAC before deciding anything on rates, but there would be no compulsion on the governor to go by the suggestions of the TAC.
What should you as an investor do?
As an investor, you would be better-off not to speculate on any of such events and focus on investing as per your asset allocation, which takes into consideration your financial goals and risk appetite. While investing in debt funds, look at your time horizon before investing. It is vital to note that most of the rally has already been captured at the longer end, although some steam remains on the expectation of an accommodative monetary policy stance by RBI. Therefore, don't go overboard while investing at the longer end; refrain from investing more than 20% of your allocation in debt funds We suggest, consider dynamic bond (as they are enabled by their investment mandate to take positions across maturity profile of debt papers) while taking exposure at the longer end, provided you have an investment horizon of at least 3 years. In case you have a time horizon of less than a year, stay away from funds with longer maturities. If you have a short-term investment horizon of 3 to 6 months, you could consider investing in ultra-short term funds (also known as liquid plus funds). And if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds.
Don't forget that investing in debt funds is not risk-free. Therefore consider the 5-facets while investing in debt funds.
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Impact
Federal Open Market Committee (FOMC) in the United Sates (US) is scheduled to meet on September 20, 2016 and September 21, 2016 to take a decision on the direction for interest rates. Until recently, the capital and commodity markets across the globe were expecting a rate hike in the forthcoming FOMC meet. Strong views of the Fed Governor Mr Daniel Tarullo and Fed President Mr Eric Rosengren on hiking interest rates had triggered rallies in US$, last week.
However, early this week, Governor Ms Lael Brainard, an FOMC member, presented a very solid case for a less-hawkish stance in the coming meet. While speaking at the Chicago Council on Global Affairs, Chicago, Illinois, she took a contrary position to that of her fellow colleagues. Governor, Ms Lael Brainard was of the view that the case to tighten policy pre-emptively has become less compelling. She drew attention to 5 "New Normal", highlighting the limitations of old guidepost
The 5 New Normal as stated by Lael Brainard are:
- Inflation has been undershooting, and the Phillips curve has flattened
- Labour market slack has been greater than anticipated
- Foreign markets matter, especially because financial transmission is strong
- The neutral rate is likely to remain very low for some time
- Policy options are asymmetric
In simple words, Governor, Ms Lael Brainard argued that, despite the falling unemployment rate, the demand has not picked up strongly and inflation has been struggling to rise as per expectations. This happens at a time when there are higher deflationary risks emerging across the globe. According to her, all these factors may take longer than expected to correct. Thus, there are no compelling reasons for raising rates in a hurry. Higher interest rates and lower inflation may push growth even lower.
Statements from Ms Lael Brainard carry a significant weightage considering the statistical evidence she's presented while making a case for more dovish monetary policy stance.
Are gold prices poised to shine more?
Data as on September 13, 2016
(Source: ACE MF, PersonalFN Research)
As the U.S. approaches presidential elections, it appears unlikely that they would further attempt to normalise interest rates, especially when there's no urgency. This makes a strong case for higher gold prices. Lower real returns (interest rate after adjusting for inflation) would keep the sheen on gold as investors try to keep pace with inflation and take refuge amidst global uncertainty.
Therefore, 7th Pay Commission recommendations allocating a portion of the investible surplus to gold would be a prudent strategy. Allocate at least 10%-15% of your portfolio to gold and hold it with a long term investment horizon. You may buy gold Exchange Traded Funds (ETFs) or subscribe to Sovereign Gold Bonds, which are the smart ways of taking exposure to gold. Gold would stand as an effective portfolio diversifier and hedge for your portfolio. So be a smart investor and take some refuge under gold. Remember gold is store of value in times of uncertainties.
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Impact
Many old buildings located in Tier-1 cities such as Mumbai, Pune, and Delhi, do not offer safe living conditions. Some of them are ancient, and even extensive repairs do not improve their health drastically. Society members/home owners run short of funds to carry out the necessary repair and maintenance work. As a result recently, many of them are undergoing a redevelopment.
When a building undergoes reconstruction, the members (if it's a co-operative housing society) or owners /occupants (in the case of chawls and pagdi system buildings) receive financial compensation and the new accommodation in lieu of the old. Besides this, members/owners/occupants of the buildings undergoing redevelopment get additional compensation in other forms.
There has been uncertainty about the tax applied to various components of the compensation in the hands of the receiver. Primarily, this led to many disputes between tax authorities and the receivers of compensation under the redevelopment agreement. However, the recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) has provided greater clarity on tax issues and can be referred to as a case law in future.
To read more about this story and Personal FN's views over it, please click here.
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Impact
It's been more than a month now since the Rajya Sabha passed the GST Bill with a thumping majority. The Bill remained work in progress for almost a decade before all political parties could arrive at common ground, burring the hatches. Successful implementation of GST is expected to empower states and rein in corruption. However, the mere passage of the Bill wasn't enough to overhaul India's indirect taxation system. The Government has set a deadline of April 01, 2017 to roll out GST. To meet this tough target, the centre and states have slogged out since Rajya Sabha cleared the GST Bill. We have now entered the most crucial phase of India's biggest tax reform. How the centre and states perform in this stage will decide how effective the GST would be indeed.
What's the roadmap to GST now?
To be able to roll out GST on April 01, 2017, the Government has to work in the 3 areas simultaneously.
Out of these, the task of establishing a sound legal framework is clearly the toughest of all, primarily because, it may potentially create another deadlock between political parties. Moreover, the states may have conflicting views with the centre. Unless a robust legal framework is laid down, the Government can achieve little success in the remaining two areas. The non-passage of GST Bill was more a political gridlock.
To read more about this story and Personal FN's views over it, please click here. |
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If you are one among 4 crore subscribers of Employee's Provident Fund (EPF), be ready to accept a lower interest rate this financial year. In FY 2015-16, Employees Provident Fund Organisation (EPFO) paid the interest of 8.8% against the Finance Ministry's expectation of 8.7%. However, this time the Labour Ministry and Finance Ministry are on the same page and are likely to agree on 8.6%. The Finance Ministry has been holding the view of aligning the interest rates on EPF with those offered on Small Savings Schemes (SSS). The final decision will be taken by the Central Board of Trustees (CBT), the highest authority in EPFO, after projecting the income for the entire financial year. EPFO hasn't given any estimation as yet.
The trade unions have been constantly opposing the interference of the Finance Ministry in Labour ministry affairs. If EPFO cuts interest rates indeed, ongoing protests from the trade unions can't be ruled out. believes, you should pay closer attention to considering the future growth opportunities.
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Phillips Curve: The Phillips curve is an economic concept developed by A. W. Phillips showing that inflation and unemployment have a stable and inverse relationship. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.
(Source: Investopedia)
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Quote : "All the math you need in the stock market you get in the fourth grade."- Peter Lynch
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