Indian Economy INR & Investors [infographics]

So much has been written about the crashing rupee and Indian economy that this article almost looks like beating a dead horse to me but I will still beat it. It really is all old news now that India is in the doldrums – nothing seems to be working at the moment – from a minister who was credited with turning around Indian Economy way back in 1991 to hurting it significantly while being the prime minister, nothing is working.

The reason behind the Indian currency plunging to record lows has been many – from low economic growth and foreign fund outflows, a large current account deficit (CAD) [approx 5% of gross domestic product] to the US dollar gaining strength at the back of hopes of the US economy reviving. All measures by the RBI and the government have failed to stabilize the sliding rupee. Simply put, the falling rupee is an implication of the fact that investors are pulling out money as they envisage that their returns will be enhanced if they take their money elsewhere. And that is the bad news for India and Indian economy. And we investors. Here is a nice time line on the fall of the rupee from CIEL.

Indian Economy – The collateral damage

Equities

To begin with, equity markets will be volatile. The declining rupee is lowering the earnings of the Indian companies which is resulting in lower stock prices. Companies that earn through exports will have a net fall in gains no doubt. The IT and pharma sectors are probably laughing their way to the banks. But if you happen to be employed with a company that will see its profits eroded, don’t expect a hike in 2013. And that will hurt – according to Murphy’s laws, no hike in wages is almost always assisted with high inflation (the high prices of onions should ring a bell and tear here). A 1% rupee fall adds 20-25 basis points, or bps, to wholesale price inflation or WPI. Households will have less to save and invest. Your goal based investing might go for a toss momentarily, be advised.

Indian Economy and Loan rates

The lending rates are going up for sure as most of the banks have announced a hike in their base rates. Base rate is the minimum rate at which banks can lend money to consumers like you and me. Those with floating home loan rates are going to feel the pinch that is going to hurt as this will lead to increased tenor or increased EMIs. Check whether you can increase the tenor first, if not, then it’s got to be the latter – you then need to juggle around your finances to ensure you can cater to the increment. If you are a new borrower, you might want to defer your purchases – this looks like a simple advice but the deferment needs to rally happen for a year or so – I don’t envisage rates going down in the short term. But if you have no choice, go for floating loan rates so that you can ride on the advantage when the rates come down.

Readers of TheWealthWisher already know that credit card and personal loans are borrowings that you should stay miles away from so I am not going to lecture on that for the moment.

Indian Economy & Spending abroad

If you are planning to study abroad or vacation abroad, you must have been hit hard. A year back, anything you bought in one dollar might have cost you Rs 55, today that is Rs 66 approx. So you are paying more to have a vacation, study or buy anything from outside India.

As far as NRIs are concerned, the news is not all that bad. Interest rate limit of NRE deposits with maturity of 3 years + has been jacked up. The FCNR deposit rate has been  increased by 1% as well. To cash on to these rates, NRIs can look to lock into these deposits. The double advantage here is that with a higher exchange rate, the overall returns would be meaty. Not to mention the fact that there is no income-tax or wealth tax applicable on the interest earned from NRE and FCNR (B) deposits. The annual remittance limit for NRIs was reduced from $2 lakh to $75,000 in a financial year. And if you want to  remit for the purchase of property, just forget it for now.

Gold

The government has cracked down on gold as well. Import duty on gold stands at 10% and the government has said that Gold importers must retain 20% of the imported gold and in order to import more, they need to export 75% of the gold so retained. India and China account for 60% of global gold demand so you can imagine the government and economists are sure Indians will be consuming more gold in the second half of the year when festivals like Diwali and marriages come along.

Debt & Equity

As far as equities go, they were meant for the long term so you should not fret at all. If you see red colors all over your stock or mutual fund portfolio, there is no need to panic. You need to keep faith in long term investing most now. Read Money Today’s take on the future of some stocks and how the markets might pan out. If you want to invest in debt funds, go with dynamic bond funds and leave the rest to the fund manager to manage. You can look at short term funds and/or debt/income funds depending on your time horizon or investments – it would be ideal for you to contact your financial planner for clarification on this matter.

Last but not the least, bring some sanity around what is going on. There is absolutely no use checking your losses each hour. Note that what is happening is not under your control and worrying will not solve any purposes. You are on the right track if you have invested your hard earned money by aligning it so the financial goals you have in life – if you aligned them to returns you wanted quickly, God bless you. Sorry, America bless you !

Lastly, me favorite infographics on this subject – Indian Economy, rupee & investors. Enjoy and share !