How to make the most of the RBI credit policy statement for personal finance

Human beings are passionate about money. Yet, personal finance is the most neglected segment in India. A lot of matters related to money are dealt with emotions. Many decisions are taken with two very powerful ones — greed and fear. In the late 90s, Robert Kiyosaki, an American businessman and writer, authored a book titled Rich Dad, Poor Dad.

He highlighted that the only way to deal with powerful emotions is to build financial knowledge about things like investments, risk and debt. “Despite being vital for both personal and societal prosperity, we receive no training in financial intelligence,” the author argues. This is so true. How many of us really look at the wealth of information around and try making sense of it every day? We simply react to things.

Last week, the Reserve Bank of India Monetary Policy Committee (MPC) announced the first credit policy for 2018-19. We read that the committee chose to leave borrowing rates untouched. A simple explanation of the policy is that the RBI committee is watching the future trend in prices and does not think it is an appropriate time to either reduce borrowing rates for us or increase them. When this statement is announced, RBI releases a number of documents.

If you think the state of the economy matters to you and your personal finances, you need to take a look at them. However, the way the information is released and put out in the Press, it can get overwhelming.

It will stall your enthusiasm that you have gathered by reading this column and make you squirm. We always argued that the basic premise for looking up any financial document is to get clues to the future. Today’s market prices are a function of tomorrow’s profits.

You must apply a similar thought to the 85-page Monetary Policy Report released. Along with the report, RBI also released multiple forecast surveys. These include consumer sentiment, professionals forecast for key economic indicators, inflation expectation survey of households among others.

The outlook

This is perhaps the most important chapter in the report. The report highlights six important factors that could influence future policy-making. The RBI committee report projects consumer price inflation to rise over 5 per cent due to low prices last year in the quarter to June 2018.

It is expected to then moderate to 4.4 per cent in the next two quarters. Similarly, India’s gross domestic product (GDP) growth is expected to move up to 7.4 per cent in 2018-19 from 6.6 per cent in the year-ago period.

The following are the key drivers for faster growth projected:

Economic activity improving

RBI surveys of future factory capacity utilisation, order book and business sentiment indicate that the economic activity is gathering pace in 2018-19. The teething troubles related to the implementation of the GST are receding.

A lot of small and medium-sized businesses struggled as the government moved to a single GST tax regime from a complex web of taxation. They faced short-term strain on their finances, as meeting deadlines under the new system meant borrowing.

Credit off-take improving

The year-on-year growth rate of bank credit for the banking sector was 11.1 per cent in March 2018, the fastest since the quarter to September 2016.

If banks give loans actively, it is good news for the overall economic activity. The report says that it is positive for the manufacturing sector and the new investment activity.

Companies raised money

In 2017- 18, companies raised a record Rs 84,357 crore through the initial public offering. This resource mobilisation from the primary market could strengthen investment activity in the period ahead.

Companies will deploy these resources in expanding capacity and creating jobs. This is expected to boost the economy.

NPA problem resolution

The government has put the process of resolution on nonperforming loans of banks on a fast track under the Insolvency and Bankruptcy Code or IBC. This should create headroom for banks to lend more money to businesses.

Faster global growth

The RBI committee observes that the global trade growth has accelerated. This should boost demands for goods and services from India and give a boost to exports.

Stronger rural growth

The thrust on rural and infrastructure sectors in the Budget is expected to rejuvenate the rural demand and also encourage industrial expansion.

When the RBI committee reviews the outlook, it also highlights some red flags.

Risks to global growth

The trade war between major world economies could trigger higher tariffs and hurt global trade. This may hurt India’s exports despite the prospect of a stronger economic growth.

Oil prices

The RBI report expects crude oil prices to remain around $68 per barrel mark. If any change occurs here, it could affect India as it imports 80 per cent of the oil needs.

Food inflation The RBI

expects a normal monsoon. However, a deficient monsoon could lower overall GDP growth by around 0.2 to 0.3 per cent in 2018-19. The Union Budget proposed revised guidelines for arriving at the minimum selling price or MSPs for Kharif crops.

If the monsoon is weak and budget proposals are implemented, inflation could be higher than estimated by 0.8 per cent. The RBI rate policy is linked to the consumer price inflation.

If prices of goods and services rise, inflation will rise and RBI will have to keep borrowing rates high. As far as your personal finance is concerned, you need to keep in mind this correlation. When RBI keeps borrowing rates low, your loans get cheaper but your fixed deposit rates go lower too.

When RBI hikes borrowing rates, your loans get expensive but fixed deposit rates go up. The correlation between interest rates and stock markets is usually the inverse. When rates go up, share prices fall. And vice versa.

(Author is publisher and founder at Simplus Information Services Pvt. Ltd.)