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Monetary Policy, Sale in Stock Markets and Future Course of Investments

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6.10.2018
  
"They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety" – Benjamin Franklin

RBI surprised most market pundits by keeping the policy rates unchanged. Rising interest rates in US and other economies, soaring crude oil prices, falling rupee, global trade war etc. were good reasons that had contributed to strong belief of most of the analysts that RBI will increase interest rates to decrease money supply thereby control inflation and contain downfall of rupee. But RBI thought otherwise. The country experienced average monsoon this year. But good thing about the monsoon this time was that it spanned well across geographical spreads of the country. This will boost agricultural production in the country. Manufacturing sector has also come out of the glitches of demonetization and GST. GDP is now improving and is expected to grow at 7.4 this year.

The aim of RBI’s monetary policy is not only to keep inflation in a specific range but also provide desired liquidity to the market to enable it achieve higher GDP growth. Since crude oil prices or US interest rates are not in control of RBI, it probably took a chance by not increasing rates this time. Though we at InvestmentMitra were expecting RBI to raise CRR or SLR to absorb some liquidity from the market to stabilize rupee rather than increasing repo rates.

Festival Sale in Stock Markets – People and merchandise companies both wait passionately for October & November - the festival season of India. Indians do most of their shopping during this period. This year, in addition to sale on regular products you buy, stock market investments are also available at deep discounts to you. Nifty and sensex are down by almost 12% from their peaks. Reasons attributed to this are falling rupee, rising crude prices, global trade war etc., same that were being cited for repo rate increase by RBI.

All these things are short term phenomenon and may not last for about a year even. Rupee will stabilize at one price sooner or later. During last five years dollar price had been moving between Rs 60 to Rs 69 per dollar. In June 2008 crude oil prices achieved its peak at US$ 141.32 per barrel and within 8 months it plunged to around US$34. It rose again and remained between US $ 80 & US$ 110 during mid-2011 and mid-2014 before plunging again to around US$30. Global unrest is always there whether in the form of actual war, terror threats or trade war. *All through this period Indian GDP, on an average, has been growing over 7%.*

What Should an Investor Do - Indian consumption story is still very strong and whole world is eyeing to exploit Indian markets. Political uncertainty may keep markets volatile till general election happens in May next year. Prior to that state elections in November will act as teaser to the parliamentary elections. Whichever party may form government, growth in India is not going to be affected much. At most it may slow down a bit but India will remain one of the fastest growing economy for many years to come unless something drastic like war or civil war happens.

For those who invest based on asset – allocation model, present is good time to rebalance your portfolio. And for those who endeavor exploit the opportunity to reap good returns from the investments, must take advantage of sale that is going on in stock markets. They should invest 25% of their long term surplus that they can invest for at least 3 or more years. Bond yields have also come down a lot. Those in higher tax bracket should seriously consider buying tax free bonds that are available at around 6.4% to 6.5% yields.

We at InvestmentMitra wish you happy shopping this festival season. Please do let us know in case you have any query or need advice on your investments.

Happy Investing!

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