Monetary Policy : RBI surprises with a rate cut. RBI STAYS AHEAD OF THE CURVE, CUTS REPO RATE AND BRINGS THE STANCE BACK TO ‘NEUTRAL’.
Contrary to market expectations, the RBI announced a rate cut of 25bps in its sixth bi-monetary policy, along with the much anticipated tweaking of its stance. The RBI altered its stance from “calibrated tightening” to “neutral”. The move came as a positive surprise for the markets, which has focused on growing fiscal concerns amidst a rise in spending, the large borrowing, and the impact of inflation in the long term. To stay ahead of the curve and move in line with the inflation and growth dynamics, the RBI decided to tilt toward a more dovish policy stance. The repo rate has been reduced to 6.25% from 6.50% earlier and consequently the other aligned rates too stand reduced by equal percentage points. The decision to change the policy stance was unanimous; however, the committee voted 4:2 in favor of cutting the rate.
Key points discussed in the policy review are as follows:
Inflation outlook
CPI inflation has been quite muted for the past few quarters, mostly on account of deflation in food prices. The CFPI has declined significantly causing retail inflation prints to collapse. The committee feels that food prices are expected to remain benign in the short term on account of oversupply. As we had highlighted in our macro capsules on the CPI, inflation in health and education has been unusually high, which was pointed out by the RBI too. Inflation in healthcare and medical services remains high with December inflation touching 9%. Education costs have also been soaring, with a rate of 8.4% as of December. The miscellaneous component of the CPI, which accounts for 27.2% of the overall index, grew at the highest rate of 6.45%. Core inflation was seen at 5.7% and has stayed above 5% for the last 12 months. The committee maintains a benign outlook for inflation and has further reduced its inflation forecast to 2.8% in Q4FY19. It expects inflation to be at 3.2%–3.4% in H1FY20, 60–80bps lower than the previous estimates. The RBI pegged Q3FY20 inflation at 3.9%. The RBI believes that the high inflation in Health and Education can be a one-off phenomenon. The medium-term target for headline inflation has been retained at 4% on a durable basis.
Growth outlook
The committee cites CSO’s GDP growth projection of 7.2% for the current year and expects growth to pick up to 7.4% in FY20. Factors expected to influence the growth outlook in the medium term are crude oil prices, trade balance, trade tensions, global growth momentum, flow of credit in the system, etc. At present, the flow of credit to the industry remains muted and a cause of concern that can hinder economic growth. Liquidity and credibility crises emanating from the NBFC segment may also threaten the pace of corporate growth. High-frequency indicators, however, point toward a moderate pace of economic activity. Agricultural output is expected to decelerate in FY19 and rabi sowing has been lower than previous years. The tone of the policy suggests moderation in economic growth, which seems to have pushed the needle in favor of a dovish policy action.
Liquidity
Average liquidity in the banking system has remained quite volatile, swinging from large deficit a few days ago to surplus mode as of today. The RBI has effectively managed liquidity conditions through OMOs and CMBs. A rise in demand for currency in hand has been one of the reasons draining systemic/banking liquidity, apart from the impact of interventions in the forex market. ‘Currency with Public’ increased by nearly 3.2 lakh crores over the year, roughly at 20%, much higher than the normal historical rate. The rate of growth in cash also seems high from the standpoint that the nominal growth rate of the economy during the period was 10–11%. The committee did not explicitly outline its policy on liquidity, but the governor in the post-policy conference highlighted the RBI intent to lend liquidity support on a need basis. Till elections, demand for currency in hand may rise even further, thus requiring a closer watch.
NBFC: Risk Weights and Harmonization
Turning to NBFCs, a segment that has been bogged down by credibility issues, the RBI tweaked the policy of risk weights. Under the existing guidelines, all categories of NBFCs are uniformly risk-weighted at 100%. To facilitate flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted as per ratings assigned by the accredited rating agencies, in a manner similar to that for corporates. Exposures to CICs will continue to be risk-weighted at 100%. Various categories of NBFCs have evolved over time pertaining to specific sector/asset classes. Regulations put in place for each NBFC category have also been somewhat different. It has now been decided to harmonize major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce, to a large extent, the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations. It will cover 99% of the NBFCs by number. Guidelines in this regard will be issued by the end of February 2019. Further, with the recent rationalization and liberalization of ECB norms, differential rules applicable to various categories of NBFCs stand harmonized.
Fiscal concerns
What the bond markets have been worried about largely was fiscal concerns emanating from the recent budgetary dole outs. The rise in government spending is expected to have a trickle-down impact on higher borrowing. However, the policy statement remains devoid of any mention of fiscal issues. Nevertheless, during the press conference, the governor pointed to the fact that the expected fiscal slippage was in fact taking into consideration while making its projections. As per the interim budget, fiscal deficit is projected at 3.4% of the GDP for FY19 and FY20.
View
Despite a surprise rate action and a change in policy stance, debt markets showed only marginal positive movement, with the 10-year G-Sec easing by 4bps to 7.33%. The reason for this is the fiscal concern, which has the capacity to alter interest rate expectations. The policy stance being changed to neutral and a rate reduction is a harbinger of a lower interest rate scenario for the subsequent year. However, various factors would affect the path of interest rates, most importantly the magnitude of government borrowing, which would dictate the level of yields at the longer end.
The RBI observes that “the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.”
The RBI’s shift in focus toward supporting growth points toward benign interest rates going ahead. Nevertheless, the RBI also highlighted that the future course of rate actions will be data dependent. Investors are therefore advised to take a phased investment approach to investing in long-duration bonds/portfolios. Investors are advised to take a cautious stance toward credit risk funds and invest only as per risk appetite. Investment in good quality high-yield products can still be a good investment option, considering the rise in yields across the NBFC spectrum. We would recommend investors to also look at locking in a higher yield through FMPs.
Disclaimer: This document is STRICTLY for authorised recipients only and is prepared for information purposes only. The information provided herein, we believe, is from reliable sources. IndiaNivesh is not liable for the accuracy of the source data as well as the results of the calculations based on the same. We do not claim that the data provided herein is accurate and complete in all respects. This is not an offer or solicitation of any offer to buy or sell securities. No action is intended to be taken by the recipients based on this document. The recipients may take their decisions based on their own judgement and independent advice that they may receive before making any investment or disinvestment decisions. The recipients are advised not to take any decision only on the basis of this document. No portion of this document should be printed, reprinted, redistributed, reproduced, duplicated or sold.
Posted by Mehul Kothari | Published on 11-FEB-2019
Monetary Policy : RBI surprises with a rate cut.RBI STAYS AHEAD OF THE CURVE, CUTS REPO RATE AND BRINGS THE STANCE BACK TO ‘NEUTRAL’.Contrary to market expectations, the RBI announced a rate cut of 25bps in its sixth bi-monetary policy, along with the much anticipated tweaking of its stance. The RBI altered its stance from “calibrated tightening” to “neutral”. The move came as a positive surprise for the markets, which has focused on growing fiscal concerns amidst a rise in spending, the large borrowing, and the impact of inflation in the long term. To stay ahead of the curve and move in line with the inflation and growth dynamics, the RBI decided to tilt toward a more dovish policy stance. The repo rate has been reduced to 6.25% from 6.50% earlier and consequently the other aligned rates too stand reduced by equal percentage points. The decision to change the policy stance was unanimous; however, the committee voted 4:2 in favor of cutting the rate.
Key points discussed in the policy review are as follows:Inflation outlookCPI inflation has been quite muted for the past few quarters, mostly on account of deflation in food prices. The CFPI has declined significantly causing retail inflation prints to collapse. The committee feels that food prices are expected to remain benign in the short term on account of oversupply. As we had highlighted in our macro capsules on the CPI, inflation in health and education has been unusually high, which was pointed out by the RBI too. Inflation in healthcare and medical services remains high with December inflation touching 9%. Education costs have also been soaring, with a rate of 8.4% as of December. The miscellaneous component of the CPI, which accounts for 27.2% of the overall index, grew at the highest rate of 6.45%. Core inflation was seen at 5.7% and has stayed above 5% for the last 12 months. The committee maintains a benign outlook for inflation and has further reduced its inflation forecast to 2.8% in Q4FY19. It expects inflation to be at 3.2%–3.4% in H1FY20, 60–80bps lower than the previous estimates. The RBI pegged Q3FY20 inflation at 3.9%. The RBI believes that the high inflation in Health and Education can be a one-off phenomenon. The medium-term target for headline inflation has been retained at 4% on a durable basis.Growth outlookThe committee cites CSO’s GDP growth projection of 7.2% for the current year and expects growth to pick up to 7.4% in FY20. Factors expected to influence the growth outlook in the medium term are crude oil prices, trade balance, trade tensions, global growth momentum, flow of credit in the system, etc. At present, the flow of credit to the industry remains muted and a cause of concern that can hinder economic growth. Liquidity and credibility crises emanating from the NBFC segment may also threaten the pace of corporate growth. High-frequency indicators, however, point toward a moderate pace of economic activity. Agricultural output is expected to decelerate in FY19 and rabi sowing has been lower than previous years. The tone of the policy suggests moderation in economic growth, which seems to have pushed the needle in favor of a dovish policy action.LiquidityAverage liquidity in the banking system has remained quite volatile, swinging from large deficit a few days ago to surplus mode as of today. The RBI has effectively managed liquidity conditions through OMOs and CMBs. A rise in demand for currency in hand has been one of the reasons draining systemic/banking liquidity, apart from the impact of interventions in the forex market. ‘Currency with Public’ increased by nearly 3.2 lakh crores over the year, roughly at 20%, much higher than the normal historical rate. The rate of growth in cash also seems high from the standpoint that the nominal growth rate of the economy during the period was 10–11%. The committee did not explicitly outline its policy on liquidity, but the governor in the post-policy conference highlighted the RBI intent to lend liquidity support on a need basis. Till elections, demand for currency in hand may rise even further, thus requiring a closer watch.
NBFC: Risk Weights and HarmonizationTurning to NBFCs, a segment that has been bogged down by credibility issues, the RBI tweaked the policy of risk weights. Under the existing guidelines, all categories of NBFCs are uniformly risk-weighted at 100%. To facilitate flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted as per ratings assigned by the accredited rating agencies, in a manner similar to that for corporates. Exposures to CICs will continue to be risk-weighted at 100%. Various categories of NBFCs have evolved over time pertaining to specific sector/asset classes. Regulations put in place for each NBFC category have also been somewhat different. It has now been decided to harmonize major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce, to a large extent, the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations. It will cover 99% of the NBFCs by number. Guidelines in this regard will be issued by the end of February 2019. Further, with the recent rationalization and liberalization of ECB norms, differential rules applicable to various categories of NBFCs stand harmonized.Fiscal concernsWhat the bond markets have been worried about largely was fiscal concerns emanating from the recent budgetary dole outs. The rise in government spending is expected to have a trickle-down impact on higher borrowing. However, the policy statement remains devoid of any mention of fiscal issues. Nevertheless, during the press conference, the governor pointed to the fact that the expected fiscal slippage was in fact taking into consideration while making its projections. As per the interim budget, fiscal deficit is projected at 3.4% of the GDP for FY19 and FY20.ViewDespite a surprise rate action and a change in policy stance, debt markets showed only marginal positive movement, with the 10-year G-Sec easing by 4bps to 7.33%. The reason for this is the fiscal concern, which has the capacity to alter interest rate expectations. The policy stance being changed to neutral and a rate reduction is a harbinger of a lower interest rate scenario for the subsequent year. However, various factors would affect the path of interest rates, most importantly the magnitude of government borrowing, which would dictate the level of yields at the longer end.The RBI observes that “the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.”The RBI’s shift in focus toward supporting growth points toward benign interest rates going ahead. Nevertheless, the RBI also highlighted that the future course of rate actions will be data dependent. Investors are therefore advised to take a phased investment approach to investing in long-duration bonds/portfolios. Investors are advised to take a cautious stance toward credit risk funds and invest only as per risk appetite. Investment in good quality high-yield products can still be a good investment option, considering the rise in yields across the NBFC spectrum. We would recommend investors to also look at locking in a higher yield through FMPs.
Disclaimer: This document is STRICTLY for authorised recipients only and is prepared for information purposes only. The information provided herein, we believe, is from reliable sources. IndiaNivesh is not liable for the accuracy of the source data as well as the results of the calculations based on the same. We do not claim that the data provided herein is accurate and complete in all respects. This is not an offer or solicitation of any offer to buy or sell securities. No action is intended to be taken by the recipients based on this document. The recipients may take their decisions based on their own judgement and independent advice that they may receive before making any investment or disinvestment decisions. The recipients are advised not to take any decision only on the basis of this document. No portion of this document should be printed, reprinted, redistributed, reproduced, duplicated or sold.)
Posted by Mehul Kothari | Published on 14-FEB-2019
Investor profile is all about knowing your preferences in investment decisions. Before you start investing, it’s important to know the type of investor you really are. More often than not, we assess our strengths and weaknesses differently. Going through a formal investment profiling would help in creating a portfolio for the long term without having to re-evaluate every now and then.So, making an investor profile depends on various factors like risk tolerance, investment goals, investment time horizon and changing financial circumstances and needs.To determine your investor profile, you could ask yourself a few questions that can help you self-evaluate.▪ Goal-based profiling
This can be understood by taking your income and expenses into consideration and then evaluating your disposable income. Calculating your disposable income is important. It tells how much money you can invest every month.
Once that is evaluated, there are a couple of funds that need to maintained. They are: o Contingency fund with at least 12 months’ expenseso Medical emergency fund for an illness which may or may not be immediately covered by health insuranceo Child’s education fund o Retirement fund Tip: There is not much you can do about your fixed expenditure like EMIs or other loan repayments. However, you can take stock of your discretionary expenditure and create a headroom for investment.
▪ Investment horizon
This can be broadly classified as short-term, mid-term or long-term based on your tenure of investment.
o Short-term investments are made for immediate goals in the next three years. These investments need to be kept handy and not be prone to volatility. Thus, it needs to be kept in a cash or liquid fund for easy access. Such investments are usually done to meet regular cash flow requirement and emergencies.
o Mid-term investments can help you meet your financial goals in five to seven years. Since the tenure is not long enough, your investment can be parked in medium-term debt investments or bank fixed deposits or even balanced funds because market volatility does not affect its liquidity after three years.
o Long term investments are for more than 10 years or indefinite timeline. Thus, equity exposure can be taken for long term investment needs.Tip: The earlier you plan for your investments, the better it is so that it can be planned well ahead and the power of compounding can really work and do wonders for your portfolio!
▪ Investment profile
Once the disposable income and the investment horizon is known, the very objective of the investment needs to be ascertained. To determine an individual’s investment profile, his risk capacity, appetite and tolerance need to be known.✓ Risk tolerance is the amount of risk you can take in your investment portfolio without losing your sleep over the volatility of the portfolio✓ Risk capacity is the amount of risk you can afford to take so that your financial goals are not jeopardised. ✓ Risk appetite is the amount of risk you need to take in order to fulfill your financial goals.
The combination of all three (as depicted in the picture) is the risk profile of the individual.
Tip: You need to determine your risk-taking capacity and investment objective together so that you can maximize returns on your investment portfolio without taking too much risk exposure.
▪ Investment experience
If one has a considerable experience in investing, his risk-taking capacity is more accurately determined than others since he knows what is expected from each investment. For new investors, it is inevitable that a new investment option needs to be explored bone-deep before taking the plunge.Tip: Age is often synonymous with lesser risk since time horizon is low.
▪ Asset allocation
Asset allocation is all about choosing an investment strategy and products based on your risk appetite. Please note that it’s important to review your asset allocation once a year as it can change with time due to change in your investment goal and risk tolerance. Tip: Equity is healthy and good for your portfolio but so is debt. A mix of the two blended with your investment objective and horizon can be ideal. So, monitor your ideal asset allocation at all times, irrespective of the market situations and you will see a marked difference in your overall portfolio.ConclusionIn order to excel in your investments, you need to be completely honest in your evaluation of your investor profile. Self-evaluation can be quite tricky at times and thus professional help can help you define your financial goals. You need to assess your investment needs and then design an investment strategy more appropriately.Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.)
RBI Monetary Policy Highlights: RBI Surprises With a Repo Rate Cut
Monetary Policy : RBI surprises with a rate cut.
RBI STAYS AHEAD OF THE CURVE, CUTS REPO RATE AND BRINGS THE STANCE BACK TO ‘NEUTRAL’.
Contrary to market expectations, the RBI announced a rate cut of 25bps in its sixth bi-monetary policy, along with the much anticipated tweaking of its stance. The RBI altered its stance from “calibrated tightening” to “neutral”. The move came as a positive surprise for the markets, which has focused on growing fiscal concerns amidst a rise in spending, the large borrowing, and the impact of inflation in the long term. To stay ahead of the curve and move in line with the inflation and growth dynamics, the RBI decided to tilt toward a more dovish policy stance. The repo rate has been reduced to 6.25% from 6.50% earlier and consequently the other aligned rates too stand reduced by equal percentage points. The decision to change the policy stance was unanimous; however, the committee voted 4:2 in favor of cutting the rate.
Key points discussed in the policy review are as follows:
Inflation outlook
CPI inflation has been quite muted for the past few quarters, mostly on account of deflation in food prices. The CFPI has declined significantly causing retail inflation prints to collapse. The committee feels that food prices are expected to remain benign in the short term on account of oversupply. As we had highlighted in our macro capsules on the CPI, inflation in health and education has been unusually high, which was pointed out by the RBI too. Inflation in healthcare and medical services remains high with December inflation touching 9%. Education costs have also been soaring, with a rate of 8.4% as of December. The miscellaneous component of the CPI, which accounts for 27.2% of the overall index, grew at the highest rate of 6.45%. Core inflation was seen at 5.7% and has stayed above 5% for the last 12 months. The committee maintains a benign outlook for inflation and has further reduced its inflation forecast to 2.8% in Q4FY19. It expects inflation to be at 3.2%–3.4% in H1FY20, 60–80bps lower than the previous estimates. The RBI pegged Q3FY20 inflation at 3.9%. The RBI believes that the high inflation in Health and Education can be a one-off phenomenon. The medium-term target for headline inflation has been retained at 4% on a durable basis.
Growth outlook
The committee cites CSO’s GDP growth projection of 7.2% for the current year and expects growth to pick up to 7.4% in FY20. Factors expected to influence the growth outlook in the medium term are crude oil prices, trade balance, trade tensions, global growth momentum, flow of credit in the system, etc. At present, the flow of credit to the industry remains muted and a cause of concern that can hinder economic growth. Liquidity and credibility crises emanating from the NBFC segment may also threaten the pace of corporate growth. High-frequency indicators, however, point toward a moderate pace of economic activity. Agricultural output is expected to decelerate in FY19 and rabi sowing has been lower than previous years. The tone of the policy suggests moderation in economic growth, which seems to have pushed the needle in favor of a dovish policy action.
Liquidity
Average liquidity in the banking system has remained quite volatile, swinging from large deficit a few days ago to surplus mode as of today. The RBI has effectively managed liquidity conditions through OMOs and CMBs. A rise in demand for currency in hand has been one of the reasons draining systemic/banking liquidity, apart from the impact of interventions in the forex market. ‘Currency with Public’ increased by nearly 3.2 lakh crores over the year, roughly at 20%, much higher than the normal historical rate. The rate of growth in cash also seems high from the standpoint that the nominal growth rate of the economy during the period was 10–11%. The committee did not explicitly outline its policy on liquidity, but the governor in the post-policy conference highlighted the RBI intent to lend liquidity support on a need basis. Till elections, demand for currency in hand may rise even further, thus requiring a closer watch.
NBFC: Risk Weights and Harmonization
Turning to NBFCs, a segment that has been bogged down by credibility issues, the RBI tweaked the policy of risk weights. Under the existing guidelines, all categories of NBFCs are uniformly risk-weighted at 100%. To facilitate flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted as per ratings assigned by the accredited rating agencies, in a manner similar to that for corporates. Exposures to CICs will continue to be risk-weighted at 100%. Various categories of NBFCs have evolved over time pertaining to specific sector/asset classes. Regulations put in place for each NBFC category have also been somewhat different. It has now been decided to harmonize major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce, to a large extent, the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations. It will cover 99% of the NBFCs by number. Guidelines in this regard will be issued by the end of February 2019. Further, with the recent rationalization and liberalization of ECB norms, differential rules applicable to various categories of NBFCs stand harmonized.
Fiscal concerns
What the bond markets have been worried about largely was fiscal concerns emanating from the recent budgetary dole outs. The rise in government spending is expected to have a trickle-down impact on higher borrowing. However, the policy statement remains devoid of any mention of fiscal issues. Nevertheless, during the press conference, the governor pointed to the fact that the expected fiscal slippage was in fact taking into consideration while making its projections. As per the interim budget, fiscal deficit is projected at 3.4% of the GDP for FY19 and FY20.
View
Despite a surprise rate action and a change in policy stance, debt markets showed only marginal positive movement, with the 10-year G-Sec easing by 4bps to 7.33%. The reason for this is the fiscal concern, which has the capacity to alter interest rate expectations. The policy stance being changed to neutral and a rate reduction is a harbinger of a lower interest rate scenario for the subsequent year. However, various factors would affect the path of interest rates, most importantly the magnitude of government borrowing, which would dictate the level of yields at the longer end.
The RBI observes that “the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.”
The RBI’s shift in focus toward supporting growth points toward benign interest rates going ahead. Nevertheless, the RBI also highlighted that the future course of rate actions will be data dependent. Investors are therefore advised to take a phased investment approach to investing in long-duration bonds/portfolios. Investors are advised to take a cautious stance toward credit risk funds and invest only as per risk appetite. Investment in good quality high-yield products can still be a good investment option, considering the rise in yields across the NBFC spectrum. We would recommend investors to also look at locking in a higher yield through FMPs.
Disclaimer: This document is STRICTLY for authorised recipients only and is prepared for information purposes only. The information provided herein, we believe, is from reliable sources. IndiaNivesh is not liable for the accuracy of the source data as well as the results of the calculations based on the same. We do not claim that the data provided herein is accurate and complete in all respects. This is not an offer or solicitation of any offer to buy or sell securities. No action is intended to be taken by the recipients based on this document. The recipients may take their decisions based on their own judgement and independent advice that they may receive before making any investment or disinvestment decisions. The recipients are advised not to take any decision only on the basis of this document. No portion of this document should be printed, reprinted, redistributed, reproduced, duplicated or sold.
Previous Story
RBI Monetary Policy Highlights: RBI Surprises With a Repo Rate Cut
Monetary Policy : RBI surprises with a rate cut.RBI STAYS AHEAD OF THE CURVE, CUTS REPO RATE AND BRINGS THE STANCE BACK TO ‘NEUTRAL’.Contrary to market expectations, the RBI announced a rate cut of 25bps in its sixth bi-monetary policy, along with the much anticipated tweaking of its stance. The RBI altered its stance from “calibrated tightening” to “neutral”. The move came as a positive surprise for the markets, which has focused on growing fiscal concerns amidst a rise in spending, the large borrowing, and the impact of inflation in the long term. To stay ahead of the curve and move in line with the inflation and growth dynamics, the RBI decided to tilt toward a more dovish policy stance. The repo rate has been reduced to 6.25% from 6.50% earlier and consequently the other aligned rates too stand reduced by equal percentage points. The decision to change the policy stance was unanimous; however, the committee voted 4:2 in favor of cutting the rate. Key points discussed in the policy review are as follows:Inflation outlookCPI inflation has been quite muted for the past few quarters, mostly on account of deflation in food prices. The CFPI has declined significantly causing retail inflation prints to collapse. The committee feels that food prices are expected to remain benign in the short term on account of oversupply. As we had highlighted in our macro capsules on the CPI, inflation in health and education has been unusually high, which was pointed out by the RBI too. Inflation in healthcare and medical services remains high with December inflation touching 9%. Education costs have also been soaring, with a rate of 8.4% as of December. The miscellaneous component of the CPI, which accounts for 27.2% of the overall index, grew at the highest rate of 6.45%. Core inflation was seen at 5.7% and has stayed above 5% for the last 12 months. The committee maintains a benign outlook for inflation and has further reduced its inflation forecast to 2.8% in Q4FY19. It expects inflation to be at 3.2%–3.4% in H1FY20, 60–80bps lower than the previous estimates. The RBI pegged Q3FY20 inflation at 3.9%. The RBI believes that the high inflation in Health and Education can be a one-off phenomenon. The medium-term target for headline inflation has been retained at 4% on a durable basis.Growth outlookThe committee cites CSO’s GDP growth projection of 7.2% for the current year and expects growth to pick up to 7.4% in FY20. Factors expected to influence the growth outlook in the medium term are crude oil prices, trade balance, trade tensions, global growth momentum, flow of credit in the system, etc. At present, the flow of credit to the industry remains muted and a cause of concern that can hinder economic growth. Liquidity and credibility crises emanating from the NBFC segment may also threaten the pace of corporate growth. High-frequency indicators, however, point toward a moderate pace of economic activity. Agricultural output is expected to decelerate in FY19 and rabi sowing has been lower than previous years. The tone of the policy suggests moderation in economic growth, which seems to have pushed the needle in favor of a dovish policy action.LiquidityAverage liquidity in the banking system has remained quite volatile, swinging from large deficit a few days ago to surplus mode as of today. The RBI has effectively managed liquidity conditions through OMOs and CMBs. A rise in demand for currency in hand has been one of the reasons draining systemic/banking liquidity, apart from the impact of interventions in the forex market. ‘Currency with Public’ increased by nearly 3.2 lakh crores over the year, roughly at 20%, much higher than the normal historical rate. The rate of growth in cash also seems high from the standpoint that the nominal growth rate of the economy during the period was 10–11%. The committee did not explicitly outline its policy on liquidity, but the governor in the post-policy conference highlighted the RBI intent to lend liquidity support on a need basis. Till elections, demand for currency in hand may rise even further, thus requiring a closer watch. NBFC: Risk Weights and HarmonizationTurning to NBFCs, a segment that has been bogged down by credibility issues, the RBI tweaked the policy of risk weights. Under the existing guidelines, all categories of NBFCs are uniformly risk-weighted at 100%. To facilitate flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted as per ratings assigned by the accredited rating agencies, in a manner similar to that for corporates. Exposures to CICs will continue to be risk-weighted at 100%. Various categories of NBFCs have evolved over time pertaining to specific sector/asset classes. Regulations put in place for each NBFC category have also been somewhat different. It has now been decided to harmonize major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce, to a large extent, the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations. It will cover 99% of the NBFCs by number. Guidelines in this regard will be issued by the end of February 2019. Further, with the recent rationalization and liberalization of ECB norms, differential rules applicable to various categories of NBFCs stand harmonized.Fiscal concernsWhat the bond markets have been worried about largely was fiscal concerns emanating from the recent budgetary dole outs. The rise in government spending is expected to have a trickle-down impact on higher borrowing. However, the policy statement remains devoid of any mention of fiscal issues. Nevertheless, during the press conference, the governor pointed to the fact that the expected fiscal slippage was in fact taking into consideration while making its projections. As per the interim budget, fiscal deficit is projected at 3.4% of the GDP for FY19 and FY20.ViewDespite a surprise rate action and a change in policy stance, debt markets showed only marginal positive movement, with the 10-year G-Sec easing by 4bps to 7.33%. The reason for this is the fiscal concern, which has the capacity to alter interest rate expectations. The policy stance being changed to neutral and a rate reduction is a harbinger of a lower interest rate scenario for the subsequent year. However, various factors would affect the path of interest rates, most importantly the magnitude of government borrowing, which would dictate the level of yields at the longer end.The RBI observes that “the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.”The RBI’s shift in focus toward supporting growth points toward benign interest rates going ahead. Nevertheless, the RBI also highlighted that the future course of rate actions will be data dependent. Investors are therefore advised to take a phased investment approach to investing in long-duration bonds/portfolios. Investors are advised to take a cautious stance toward credit risk funds and invest only as per risk appetite. Investment in good quality high-yield products can still be a good investment option, considering the rise in yields across the NBFC spectrum. We would recommend investors to also look at locking in a higher yield through FMPs. Disclaimer: This document is STRICTLY for authorised recipients only and is prepared for information purposes only. The information provided herein, we believe, is from reliable sources. IndiaNivesh is not liable for the accuracy of the source data as well as the results of the calculations based on the same. We do not claim that the data provided herein is accurate and complete in all respects. This is not an offer or solicitation of any offer to buy or sell securities. No action is intended to be taken by the recipients based on this document. The recipients may take their decisions based on their own judgement and independent advice that they may receive before making any investment or disinvestment decisions. The recipients are advised not to take any decision only on the basis of this document. No portion of this document should be printed, reprinted, redistributed, reproduced, duplicated or sold.)
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Making your investor profile
Investor profile is all about knowing your preferences in investment decisions. Before you start investing, it’s important to know the type of investor you really are. More often than not, we assess our strengths and weaknesses differently. Going through a formal investment profiling would help in creating a portfolio for the long term without having to re-evaluate every now and then.So, making an investor profile depends on various factors like risk tolerance, investment goals, investment time horizon and changing financial circumstances and needs.To determine your investor profile, you could ask yourself a few questions that can help you self-evaluate.▪ Goal-based profiling This can be understood by taking your income and expenses into consideration and then evaluating your disposable income. Calculating your disposable income is important. It tells how much money you can invest every month. Once that is evaluated, there are a couple of funds that need to maintained. They are: o Contingency fund with at least 12 months’ expenseso Medical emergency fund for an illness which may or may not be immediately covered by health insuranceo Child’s education fund o Retirement fund Tip: There is not much you can do about your fixed expenditure like EMIs or other loan repayments. However, you can take stock of your discretionary expenditure and create a headroom for investment. ▪ Investment horizon This can be broadly classified as short-term, mid-term or long-term based on your tenure of investment. o Short-term investments are made for immediate goals in the next three years. These investments need to be kept handy and not be prone to volatility. Thus, it needs to be kept in a cash or liquid fund for easy access. Such investments are usually done to meet regular cash flow requirement and emergencies. o Mid-term investments can help you meet your financial goals in five to seven years. Since the tenure is not long enough, your investment can be parked in medium-term debt investments or bank fixed deposits or even balanced funds because market volatility does not affect its liquidity after three years. o Long term investments are for more than 10 years or indefinite timeline. Thus, equity exposure can be taken for long term investment needs.Tip: The earlier you plan for your investments, the better it is so that it can be planned well ahead and the power of compounding can really work and do wonders for your portfolio! ▪ Investment profile Once the disposable income and the investment horizon is known, the very objective of the investment needs to be ascertained. To determine an individual’s investment profile, his risk capacity, appetite and tolerance need to be known.✓ Risk tolerance is the amount of risk you can take in your investment portfolio without losing your sleep over the volatility of the portfolio✓ Risk capacity is the amount of risk you can afford to take so that your financial goals are not jeopardised. ✓ Risk appetite is the amount of risk you need to take in order to fulfill your financial goals. The combination of all three (as depicted in the picture) is the risk profile of the individual. Tip: You need to determine your risk-taking capacity and investment objective together so that you can maximize returns on your investment portfolio without taking too much risk exposure. ▪ Investment experience If one has a considerable experience in investing, his risk-taking capacity is more accurately determined than others since he knows what is expected from each investment. For new investors, it is inevitable that a new investment option needs to be explored bone-deep before taking the plunge.Tip: Age is often synonymous with lesser risk since time horizon is low. ▪ Asset allocation Asset allocation is all about choosing an investment strategy and products based on your risk appetite. Please note that it’s important to review your asset allocation once a year as it can change with time due to change in your investment goal and risk tolerance. Tip: Equity is healthy and good for your portfolio but so is debt. A mix of the two blended with your investment objective and horizon can be ideal. So, monitor your ideal asset allocation at all times, irrespective of the market situations and you will see a marked difference in your overall portfolio.ConclusionIn order to excel in your investments, you need to be completely honest in your evaluation of your investor profile. Self-evaluation can be quite tricky at times and thus professional help can help you define your financial goals. You need to assess your investment needs and then design an investment strategy more appropriately.Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.)