X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Chewing the bitter pill - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Feb 28, 2002

    Chewing the bitter pill

    The Indian investors are a puzzled lot. Their attempts to invest safely some how boomerang. The stock markets with their glorious history have managed to scare the retail investor. The so-called safer mutual funds like UTI, have shaken investor confidence time and again. And now comes the decision to cut small savings rates by 50 basis points, the only investment avenue that has proved to be safe. The government has reduced the real interest rates. A real interest rate is the compensation, over and above anticipated inflation, that a lender demands to lend his money.

    This will certainly not go down well with the middle class that have a bulk of their savings in instruments like PPF and Post Office savings. Especially the retired community will feel the pain, as these investments are the only source of income for many.

    But the government has reasons for taking this measure. The small savings deposits by the public are basically loans to the fiscal system. The interest rates that these schemes pay are the cost of capital. Fiscal system in turn lends out this money to the industry. Now for the system to operate profitably the lending rate to the industry has to be higher than borrowing rate from the public. Consequently, higher interest rate for small savings schemes, which will be the cost of capital for the industry. High cost of capital discourages investment as it raises the break-even point for industries.

    Thus, high interest rates are a structural bottleneck for the growth in the industry. The lower interest rate will provide stimulus to the industry by

    • Lowering of financing costs for hire purchase schemes
    • Cost of capital will decline and consequently, hurdle rates for investments will drop

    The impact of the rate cut ideally over a period of time should be growth in purchases of goods and better off take in housing loans. Thus improving the demand situation. Also, increased investments by the industry, which in turn will generate more employment opportunities.

    The effort on part of the government could also be to channelize public funds directly into businesses instead the saving being made available to the industry through the financial system. The financial systems has strong norms regarding lending, which prevent them from lending in certain cases. Also, with net NPAs at 6.7% of net advances, a lot needs to be improved in the evaluation processes of the banks and intuitions. With the interest rates falling people will have to look for investment opportunities outside deposits for capital to grow. This could encourage investments in businesses.

    However, the industry too has its share of problems. The rate cut in October did not improve credit off take. The institutions are prudent about disbursements. Also fearing global competition industry has not been very keen to invest.

    Thus, now the onus shifts on to the government to rapidly improve the investment environment by removing the other structural bottlenecks like lack of infrastructure.

    Whatever be the rational is behind the rate cut, the going will certainly be tough for retired senior citizens. As on every investment of Rs 100,000, their earnings would be Rs 500 lesser.

     

     

    Equitymaster requests your view! Post a comment on "Chewing the bitter pill". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS