Indian Stock Markets Rally Post RBI Rate Cut

A few days ago, I had blogged about how 'Global Stock Markets' skid on the news of falling crude prices (pre-dominant and most quoted reason), Euro-Dollar parity, and multiple other reasons which were beyond the grasp of the common man.

Today, the Indian Stock markets had their best rally in the last 68 months. So what has changed in the world since I last blogged. Crude price is down another $5, Euro-Dollar parity has worsened, Greece has not exited the Eurozone. In the last few days, the stock markets in US and Europe have been up and down and all over the place.

Today's rally was triggered by a 0.25% reduction in the repo rate (to 7.75%). Does this small reduction in a rate prescribed by RBI's mighty governor have such a mammoth impact? Before I share my views about the event, let's understand "Repo Rate".

Repo Rate is the rate at which the RBI lends money to commercial banks. Similarly, "Reverse Repo Rate" is the rate at which RBI borrows money from commercial banks. These rates act as benchmarks for the borrowing and lending rates in the markets.

Banks use deposits through 'Current Accounts - Savings Accounts' (CASA deposits) from their customers and lend at a higher rate to other customers. The difference between the rate on the deposits and the rate on loans is called the spread or margin.

Here's why this reduction is not important in the short term.
- First, any reduction in repo rate does not percolate through the banking system to consumers immediately. It takes close to two quarters.
- Secondly, banks are quicker to up interest rates than bring down rates.
- Next, when repo rates go down and if the lending rates have to go down, then rates on deposits will also go down. Banks will not compromise on  the margins they make.

If costs of homes, cars, etc. are not coming down, does reduction in interest rates on loans 'excite' the customer to take a loan?

If companies are not running at 100% utilization of their factories, etc. as the demand for their goods is not picking up, will they take new loans to build newer capacities?

Interest movement does have an impact on a country's GDP, inflation, etc. but it cannot single handedly drive the change in a direction which the Finance Minister wants. This interest rate reduction is more of  the 'political' pressure exerted on the RBI governor.

Good Economics is Rarely Good Politics. But Bad Politics is Surely Bad Economics.

Summary - wait for a correction to buy stocks. In the interim, analyse which business / company you want to bet on for the future.

Stock Markets Skid on Global Turm-(Oil)

I couldn't resist writing on the chaos in the stock markets the world over.  In 2008, crude oil was $145 per barrel and today its close to $50 per barrel.

In the last 2 days, stock markets have fallen anywhere between 3-5%. The new year has not taken off well!! Not a single industry / company, related or unrelated to crude oil, has survived the bloodbath on the stock markets. E.g. I don't see a direct correlation between stock prices of IT companies vis-a-vis price of a barrel of crude oil!

So at what price of crude oil will global stock markets focus on nothing but the fundamentals of a company and its future growth prospects. The answer - no price is the right price.

In a market mayhem, the mantra is 'Becho Phir Socho' (Sell First and Then Think). In the last few days, I have tried to make sense of why falling crude oil prices are creating so much havoc. Some of these commenatries are as follows (my comments in italics):
- OPEC countries have not reduced supply and global demand has fallen. I don't know if demand of a growing population (across the world) in the cold winter months could actually trigger such a massive fall in demand. I am also not sure if increased use of renewable sources of energy is creating the decrease in demand for oil

- Euro v/s Dollar parity is at a multi-year low. Since the dollar has been the world's global currency, why should its dominance become a problem overnight!!

- Greece will exit the Eurozone. This small country had people panicking 2 years ago too. GDP of Greece represents 0.39% of the World Economy. Can a country cause US stock markets to tank 3%! Wow.

- The 100 day moving average has been broken and hence the trend is bearish. Though I am not an expert in technical anaylsis of stock price movement, but if the markets turnaround in the next one week and if we use say a 120 day moving average, will the trend become bullish?

I can go on and on but none of the commentaries makes sense to me. My years (not comparable to  the experience of market experts) in the stock markets has taught me one thing - any Tom, Dick and Harry on a business channel can explain just about anything of why a stock / index moved in a given direction post-facto and sound convincing. They talk with intelligent sounding stuff which the common man tends to accept as the truth. Even I sound intelligent at times. :-)

Conclusion: None of the experts on business channels place their money on their views. They even tell you that they have no personal investments in their recommendation. Take their views with a pinch of salt. Decide for yourself, place your bets, be disciplined in your entry and exit criteria for a stock. "Socho Phir Karo" (Think Before You Do).

Saving Taxes - Part 2

For those who chose 'Option 1' (and the majority of my friends fall in this category), here's why you should not 'actively' pursue this route.

- As long as you are employed, the employer will ensure that a certain amount of your salary is allocated to your Provident Fund (PF) contribution. Typically, this is 12% of your 'basic pay' which  is deducted from your salary and paid to your PF Account. One can increase his / her contribution upto 100% of 'basic pay' and is tagged as VPF (Voluntary Provident Fund). 

My personal view - maximize your contribution to your PF account; it is portable (with the new unique account number you need not worry about transferring PF accounts whenever you move jobs), allows for withdrawal, has a 'good' rate of return.

- Public Provident Fund (PPF): Many of my friends build a 'fund' for their children's education by investing in PPF. As per FY 2015, the limit is Rs. 1.5 lakh per year. PPF has a lock-in of 15 years and this perhaps is its greatest disadvantage.
My personal view - instead of PPF, invest in VPF.

With the above two categories, people tend to max out the 1.5 lakh limit available under which you 'save taxes' under Sec 80 C of the Income Tax Act. The other categories are as below:

- Premium paid towards Life Insurance / Pension policies: All of us have some form of life insurance / pension product. Whether the 'Life Cover' is commensurate with the insurance needs of the people who have bought these products is a separate discussion!. They also fall under the overall limit of Section 80 C.
My personal view - buy a high life cover with a term insurance, then an endowment / money back policy and finally, a ULIP.

- Premium paid towards Medical Insurance: This avenue encourages people to support the expenses around medical emergencies. Premium paid is deductible (subject to limits - Rs. 15,000/- per year for non senior citizens; Rs. 20,000/- for senior citizens) under Section 80D.
My personal view - buy medical insurance as early as possible, for self, and parents even if the employer provides you a group medical insurance cover.

A smaller segment 'saves taxes' by donating to charitable organizations under Section 80G. The deduction varies from 25% to 100% depending on the charity you have donated to.
My personal view - if you want to donate, then forget about getting the extra leverage of the 'tax benefit'. 

There many more options like 'interest paid on education loan', 'principal repayment for a housing loan', etc. but in all these cases potential to save tax is incidental. One does not take an education loan to study because there's an tax benefit on the interest paid!!

Let me remind you that "Investing to Save Tax is Not Investing'.

Next part is for the minority who chose Option 2.

Saving Taxes - Part 1

Am back to my blog after a long long lazy break and here's my view on 'Saving Taxes' in the Indian context.

'Death and Taxes are the most certain things in life'; the quote (though slightly modified holds true in everyone's life.

As Indians, we are groomed to save. Right from childhood, parenting has inculcated the habit of saving for a 'rainy day'. Piggy banks of our childhood give way to complex jargon of the Income Tax Act during our earning years.

As many of my friends, I too 'saved' in 'safe' (from risks) instruments. Somewhere over  the years, my efforts went from the primary focus of 'saving for the future' to 'saving from taxes'.

Over  the years where I have learnt the nuances of personal finance from personal experience (and the experience of friends and family), I would like to highlight 2 key points.

Firstly, 'saving from tax' is not investing. Secondly, saving in 'safe' instruments is a dream.

Let me elaborate on each point.
In our country, where the taxman treats every citizen as a 'dishonest' tax payer, you are guilty of tax evasion till proven innocent. Tax evasion is not defined by the quantum of tax one has evaded. As the law of the land prescribes, tax needs to be paid on most 'sources of income' and 'forms of wealth'.

Another case in point is that our constant focus is to save in instruments which as per the stipulations of the Income Tax Act help us save some tax.

Let's take an example:
Option 1: One spends Rs. 100/- in a tax saving instrument (say Insurance Policy) and gets Rs. 30/- (highest tax bracket) reduced in his tax liability.

Option 2: Alternatively, you pay 30% on your Rs. 100/- as tax and invest the remaining Rs. 70/- 

Given a choice which option will you choose.

When To Buy and When Not To Sell - Part 1

Many of my friends and colleagues ask me for the next hot tip about a stock. One of my friends even asked me if there was a stock which will help him double his investment of Rs. 10,000/- in 6 months. This was a question he asked me in 2013, way before the Indian stock markets saw a fantastic rally.

My response to him was that he was better off trying his hand at gambling than stock markets.

Many of my acquaintances enter the stock markets for 'quick returns' with 'one time investments' which will not hurt them if they lose the entire amount. A quite a few enter 'penny stocks' as they can buy more for the same corpus instead of buying a stock of a blue-chip company trading at Rs. 2,000/- a share.

Here are the few 'life experiences' of people who have 'gambled away' their money on the stock markets.
- "Buy many a penny".
If I buy 1,00,000 stocks each worth Re. 1, and if the stock increases by another Re. 1 (for a stock to move by Re. 1 is very easy afterall), then I can safely exit my investment.

- "I have not lost till I have exited at a loss"
My stock selection or the stock markets have caused my stock portfolio to fall by 75% in value. I will will not sell as what is left does not hurt me for holding the stock for another 10 years for it to come back to my cost price

- "I bought because I was told to buy"
My friend / broker / relative told me to buy a given stock and its the new 'hot pick' on Dalal Street and everyone of Business Channels have great expectations about the company.

- "I have not sold because I was not told when to sell"
I was making Rs. 1,000/- profit on the stock in a single week but I wanted to go up further. Now its 50% of my cost.

- "You handle my portfolio but give me assured returns"
I have invested in a Portfolio Management Scheme (PMS) of a large broking house and the 'capital is protected' and it will be give me returns in line with the benchmark (e.g. Nifty).

Does any of these stories sound familiar? More in my next part.