Outlook 2021…

If 2020 was a year to preserve your finance, 2021 will be a year to multiply your wealth. The global economy has restarted with a bang and emerging economies are eyeing for a double digit GDP growth, along with high single digit growth in developed nations, thanks to low base, rock bottom interest rates, rapid technological adoption, ocean of liquidity and responsible US President elect. Let’s look at how some of the investment avenues will perform in 2021:

Gold: Gold glittered all its way in 2020, and reached all-time high of ₹56,191, after 2020-low of ₹38,400. Safe heaven nature of gold made it popular amongst the investors in 2020. However, in 2021 and the years to come gold may lose its shine. After the Global Financial Crisis, Gold reached an all-time high in mid-2011 and then delivered a negative return c.17% as on 2019 end. Vaccination drive has already put pressure on the yellow metal’s price and we expect it to remain stagnant or fall in 2021 and onwards.

Crude Oil: 2020 proved out to be a nightmare for crude, but it may not be the same in 2021. With Democrats taking control over the US Parliament, we may see a downturn in US oil production. Further, Saudi Arabia and OPEC’s recent announcement of production cut to revive oil prices will support the fossil fuel’s price. On the flip side, waiver of sanction against Iran may increase the global supply. Consequently, oil may hover between $50-$55/barrel throughout 2021.

Silver: Silver was the best performing precious metal in 2020, up over 49%. After such a grandeur year, if you believe silver may take a breathing in 2021, then you may be wrong. However, forecasting silver prices is relatively a difficult task due to its volatility, Silver is seen both as a safe investment asset class, as well as an industrial metal, due to its wide scale use. Overall, silver can be a very good investment for years to come, as the metal is highly utilised in green technologies. We expect silver to give double digit return in 2021.

Indian Stock Market: The bourses discounted almost all of the economic recovery in second half of 2020, and benchmark indices delivered almost c.15% return during the pandemic year. The Nifty50 is presently trading at forward 12 month PE of 22, compared to historic PE of 17.5. Rock bottom interest rates and sharper than expected economic recovery supports the stretched valuation. However, we see very limited upside potential left for the markets in 2021. YTD Return (29Jan21) of Nifty50 stands at –2.5%, setting the stage for low market returns in 2021. Overall, markets are expected to deliver single digit return in 2021, as it will try to align with the real economy during the year.

All the best for your investment journey in 2021!
Save more, invest wisely.

Indian Stock Markets in 2020!

2020 was a Roller Coaster Year for the Global as well Indian Capital Markets. The roller coaster ensured that no one is missed during the year, which rewarded patient investors and punished fragile market participants. First half of the year witnessed tragic onset of the “Coronavirus Pandemic”, followed by worldwide Lockdowns, which rock bottomed all the global indices. Nonetheless, the roller coaster turned its course in the second half of the year, to touch the sky. World markets soared on the back of trillions of liquidity being pushed into the financial systems along with historic fiscal stimulus packages to resurrect the falling economy.

The Indian benchmark Indices (Nifty50 and BSE Sensex) delivered a return of +15% during 2020, reiterating the attractiveness of equity as an investment vehicle. The markets bounced back almost 80% from their March lows (Nifty-7511.1, Sensex- 25,638.9), and Nifty finally kissing the magical 14,000 mark on 31st December, 2020. The “hero” behind such a robust bounce back were “FIIs”, pumping in record USD22.0bn in Indian financial markets in 2020, highest in comparison to all other emerging economies. This is in sharp contrast to all other emerging economies, where FIIs were net sellers during the year.

Primary markets had steal the show in 2H’2020, with record INR1.77 lakh crore being raised in 2020 (highest ever in an year), which is 116% increase over 2019’s INR82, 241 crore. The average listing gains from the top 15 IPOs of 2020 was massive 35.5%, way above the previous high of 22.3% in 2017. Although Mrs. Bectors Food Specialities Limited IPO was the last IPO of 2020, it became the most subscribed IPO of the year, at 198.02 times.

There was no sales for almost 2 months in 2020, yet there was no respite in fixed costs. Hence, India Inc. looked for external financing to fund their operations, and there kicked in Rights Issue and QIPs which saved the day for them. Reliance Industries was one of the biggest beneficiary of external financing and it alone raised INR53, 125 crore in right issue in 1H20. Whereas, Banking and Financial Services Sector were the most sought after in the QIP segment.

The love for Indian equities was driven by several themes: corporate tax reforms, much awaited interest rate cuts, India’s growth story, abundance of global liquidity and quick economic revival on the hopes of vaccine. But markets once again proved in 2020 some of its age old theories, which never goes obsolete:

“Markets are forward looking”
“No one can predict the bottom”
“Prices are Supreme”

While you ponder upon the market performance of 2020, and if you think that you have missed the bus, don’t worry. We will soon come up with the 2021 expectations for various asset classes, including equity.

Till Then Sayonara, Take Care, Continue Your SIPs!

The BUFFETT Indicator!

The mayhem that shook the financial markets all over the world in the month of March, has now seemed to have cool off, given the stellar rally witnessed by financial markets. During this period, one indicator that was doing the rounds was the Market cap to GDP ratio, popularly known as the BUFFETT INDICATOR:

Let’s understand the indicator and its implications!
The Buffett Indicator is defined as the ratio of total value of publicly listed stocks in a country divided by the country’s Gross Domestic Product (GDP). It is used to determine whether a market is overvalued or undervalued, compared to its historical average. A number between 50 to 75 per cent is considered to be undervalued, between 75 to 90 per cent is considered to be fairly valued and above 90 per cent is considered to be overvalued. This ratio was popularized by Warren Buffett around the time of dotcom bubble. For India, the average historical ratio has hovered around 75 per cent.

But, why does this ratio matter so much?
Given the stock prices reflect expected future earnings of the Company and the GDP as a whole, represents the total value of goods and services produced in a country, the indicator gives an estimate of whether the two are moving in tandem.

Although the indicator gives an idea about market overvaluation/undervaluation, it should be used keeping in mind the following things:

Firstly, in developed markets where the contribution of various sectors to the overall growth of the economy is better represented via the capital markets, the ratio could be considered a good estimate for market valuations. However, in developing countries like India, where agriculture, unorganized sectors, MSMEs play a pivotal role in the economic growth of the country, this ratio does not bode well, as the traditional sectors do not get accurate representation in the country’s capital markets. Moreover, the ratio is likely to get impacted as newer companies get listed given the developing nature of stock markets in these countries. So, in such countries, these indicators should be used in combination with other metrics to get an accurate indication of market valuation.

Secondly, using this metric for cross country comparison to make a conclusion on the valuation front is fraught with risks. This is because each country would have a different mix of listed vs unlisted companies. Also, the composition of each economy differs. Some countries might heavily rely on commodity-oriented businesses for their growth whereas others might be dependent on service sector.

Thirdly, one can say that it’s better to use this indicator to compare an economy over a certain period as this could indicate some trend on valuations. But this method also has its limitations. The proportion of listed vs unlisted companies in a country keeps on changing over time. For example, companies like TCS, Coal India, DLF weren’t listed on the Indian Stock Exchanges till 2003. However, these businesses were in existence for many years before getting listed.

Lastly, level of interest rates in the economy. One cannot compare Market Cap/GDP ratio, without adjusting the interest rate levels. At times of low interest rate, stock valuation tends to fly high and vice versa. Hence, while comparing one must also look at interest rate scenario. On the basis of Buffet indicator markets may look overvalued today. Nonetheless, interest rates are rock bottom today and the indicator does not take into account this fact.

As of 17Oct20, India’s market value to GDP ratio stood at c. 65%, and is believed to be fairly valued. If we go only by the Buffet metrics, then there doesn’t seem to be either long or short strategy at the current valuations. However, with interest rates going down and economy gradually recovering from the health crisis, we may expect some upward movement in the equity markets.

Although, BUFFETT Indicator is widely acknowledged by stock market pundit as a reliable measure to gauge stock market valuations, we think that using the metric in isolation can give a distorted picture. Rather, it should be used in conjunction with other tools to get a better sense of valuations. Moreover, using the metric in current times is not a prudent approach owing to uncertainty on future earnings of companies as well as negative GDP growth.

Keep sharing the rare!

Which is best for you, Index Fund or ETF?

You might have heard of the two terms Index Fund and ETF before, but you may not be aware of their obscure features. Your investment portfolio is incomplete without them. Inclusion of Index Fund or/and ETF in the investment portfolio provides the required diversification and helps in long term wealth creation . Hence, they form an essential part of every good investment portfolio.

We often get queries from our readers, which one to choose between the two. On the face, Index Funds and ETF may look like twins, but in reality they are different and have different finger prints. Here we will try to explain both the financial products, and will help you to decide, which one to choose for yourself.

What is an Index Fund?
In simple terms, Index Fund is a category of Mutual Funds, whose portfolio is similar to that of a stock market index. The stock market index can be any; Nifty50, BSE Sensex, Nifty 100, etc. For example, HDFC Index Fund- Sensex, consists of all the 30 stocks which are part of the BSE Sensex, and in the same proportion. For instance, if Reliance Industries has 18.5% weight-age in Sensex, then the HDFC Index Fund-Sensex, will also try to invest 18.5% of their total Asset Under Management in Reliance Industries. Hence, one can infer that the return generated by HDFC Index Fund-Sensex will be very similar to that of the BSE Sensex.

Index fund is a passive investment fund, i.e. its target is to achieve same return of that of the benchmark. The fund manager doesn’t have to scratch his head over investment strategies and stock picking, all he has to do is replicate the portfolio of the fund with that of the chosen Index. Hence, expense ratio (fund management charges) for these type of funds is very low.

What is an ETF?
ETF or Exchange Traded Funds, as the name suggests are funds that are traded on exchange, (i.e. listed on a stock exchange) and comprises of equity, bonds, or metals or a combination thereof. Generally, Equity ETFs are passive funds and mimic a stock market index, similar to that of an Index Fund. However, unlike Index Funds, ETFs are listed on exchange. The price of an ETF on the exchange is almost similar to its net asset value (NAV). For example: SBI ETF – Nifty 50, tracks the Nifty50 in a homogeneous manner. Return on SBI ETF -NIfty 50, is almost similar to the performance of Nifty 50.

One can buy ETF on the stock exchange just like any other stock. Hence, by buying just one unit of SBI ETF – NIfty50, one can get exposure to the entire 50 stocks of Nifty 50. It is as simple as it looks.

Now, after reading about both, you might be confused, which one is better. Don’t worry, we have juts the correct solution for your confusion. Which is better Index Fund or ETF?

Systematic Investment Plan (SIP): If you are a SIP lover and need a reminder every month to invest or save, you should go with Index Fund. An Index Fund gives you the SIP option. However, the same option is not available in ETF, as ETF is not a mutual fund scheme and trades on the exchange like any other stock.

Expense Ratio: Expense ratio is the annual cost paid to fund manager by investors for management of the fund. Although expense ratio of Index Fund is low, but in comparison to ETF, it is higher. For instance, expense ratio of Index Funds typically range between 0.15% to 0.50%, whereas for ETFs, it is usually between 0.05% to 0.20%. So, why would you give the Index Fund manager higher fees for just replicating the Nifty50. It is because of the convenience offered by Index Fund.

Convenience: Once you start a SIP in Index Fund, the entire headache is now with the fund manager. Your money will be automatically invested in the Fund, every month. You don’t have to do any transaction by yourself. However, in ETF, you have to place order for the ETF through your DEMAT/Trading account, which may be little difficult for a newbie. When to place the order, how to place, at what price to place the bid, etc. So, if you are a complete newbie and want the convenience of the Index Fund, you can incur higher expense ratio and invest in Index Fund, to get a peaceful sleep.

Expenses: While investing in ETF, you will have to incur brokerages and demat account charges, which is not there in case of Index Fund. All in all, if the amount being invested in ETF is large and you invest lump sum in ETF once in a while, then brokerage charges will be lower compared to the expense ratio incurred in Index Funds.

Control: ETF offers you complete flexibility and control over your investment. You can invest in ETF on any trading day at any trading time, which is not feasible in Index Fund. Net Asset Value of an Index Fund is only available at the end of the day, while for ETF it is available throughout the day. If you have fair market knowledge and you are sure of your timings, you can go for ETF, as that will allow you to invest your money, when the markets are down and sell your investment when markets are high.

Dividends: In case of Index Funds you have an option to choose, that whether you want the dividends from portfolio stocks to get reinvested or receive the same in cash in your bank account. As a long term investor it is always advisable to go for reinvestment option. There is no reinvestment option in case of ETF, you are forced to receive dividends in your bank account. If you want to reinvest dividends in ETF, then you will have to manually investment the dividend money in ETF by yourself.

Tracking Error: Tracking error measures the deviation of the fund from its benchmark. Since both Index Funds and ETFs replicate their respective benchmarks, tracking error in case of both is low. Nevertheless, tracking error is little higher in Index Funds compared to ETF, as the index fund manager has to keep some amount in liquid funds for unit redemption, which is not the case with ETF. If you want exact return like the benchmark, then ETF is more suitable financial product for you.

Tax Implication: Tax on Index Fund is charged at the time of redemption of units. You will incur Capital Gains tax for your Index Fund. If Index Fund units are sold before 12 months, the Short Term Capital Gains Tax of 15% will be applicable. While, if they are sold after 12 months, the Long Term Capital Gains Tax of 10% will be charged, over ₹1 lakh of capital gains. Equity ETFs are taxable in the same manner as the Index Fund. You may also be taxed on the dividends received from ETF.

Final Verdict:
Overall, merits and demerits of Index Funds and ETFs are quite balanced. Nonetheless, Index Fund is suitable for new investors who are not active in markets, lack investment discipline and desire convenient investing experience. On the contrary, knowledgeable folks, with fair bit of stock market experience and having the desire for control and flexibility over their investments should go for ETFs.

Thanks for reading! Hope this will help you in your investment journey!
#rare4share, Keep sharing the rare!

How to Select the Best Mutual Fund?

Mutual fund Sahi Haii!!
Be it for SIP or Lump-Sum investment, every Tom, Dick and Harry is aware of this slogan!
However, very few are aware or have knowledge of a structured way to screen thousands of schemes, across 44 odd mutual fund houses. More often than not, people end up relying on tips or recommendation that flows across social media sites to make an investment.
No worries!
We have come out with a solution for you.
In this article, we have emulated a list of checks, that you must perform diligently to select the best mutual fund scheme.They are:

  1. Know your fund manager – Imagine a situation where you have invested your money in a scheme based on a recommendation, but you don’t know who is the guy in charge of your money! Seems strange, but sadly that is the case in our country. There are hundreds and thousands of people who don’t even know the name of the person managing their money. Let alone his/her qualifications or experience.

Ideally, you shouldn’t bring yourself in this situation. So, before selecting any scheme you must do a thorough background check of your fund manager. Like in case of selecting any stock we check the integrity of the company’s management, similar is the case for mutual fund. Any individual should perform checks like investment philosophy of the fund manager, his past performance in terms of managing different schemes, how his schemes have fared in stressed economic scenario and so on. This will help the individual to develop an intangible connect with the fund manager. It is not considered a good signal where fund manager has deviated from his past philosophies or thesis and has changed mutual fund houses frequently. (You can check any fund manager’s profile in the StockEdge app for free)

  1. Measuring past performance – How often we have linked past scenarios to make a view of the future? Most of the time, right!!!
    Analysing fund’s past performance is also no exception. However, people blatantly look at the past returns of different schemes and get over-excited by seeing such high return numbers and end up investing in those. But, while doing the exercise, there are two things that you must look at:

First, ask yourself what is your investment period. Typically, one must have a longer-term view while investing in mutual funds. So, if you fall in this category, then you must not be scared or get excited by looking at 3m, 6m or 1-year returns. What matters for you is 5-year, 7-year and 10-year returns. This is because a longer time horizon better will capture the market cycle accurately and will help you to gauge the resilience of fund’s performance in challenging times.

Secondly, returns should be looked at in terms of ROLLING Returns and not TRAILING or ABSOLUTE returns. This is because trailing returns show a distorted picture of fund performance due to a recency bias while rolling returns give a much clearer picture by measuring the fund’s performance across all time frames.
For example: Suppose you want to find out how a fund has performed over a 5-year period from 1st Jan 2014 to 31st December 2019. If you measure the fund’s performance based on trailing returns, then you simply need the Net Asset Value (NAV) as on the aforementioned dates and then you can annualize it by the number of years. However, the problem with this is that it has a recency bias, as said above. Suppose if the fund has not performed well or has given muted returns till the first 4 years and in the last year it made up for it by delivering stellar results, then trailing returns would not capture the period of below-average performance and show a better/biased picture of the fund than what it is in reality.

But with the help of Rolling Returns, you won’t get a distorted picture. Instead, it will capture the movement of fund’s performance across the 5-year period. So, if you calculate rolling returns for the same fund say on a monthly basis, then it will take into account returns generated every month between 1st Jan 2014 and 31st December 2019 and take an average of it to come out with the final return number. Having said that, we mostly see data in terms of trailing returns by various fund houses as they are easier to calculate. (You can check rolling return of a Mutual Fund on rupeevest.com for free)

  1. Expense ratio – Expense ratio is an annual fee that all mutual funds charge you for managing your money. It is expressed in percentage terms and the fees include management fees, administrative fees, operating costs, commissions and so on. For example: if you invest ₹50,000 in a fund with an annual expense ratio of 2%, then you need to pay ₹1,000 every year in fees. In return terms, if the fund generates an annual return of 15%, then the net return comes out to be 13 %. Expense ratio plays a vital role in determining how much corpus you would be able to build for your future. A higher expense ratio will eat into your returns and consequently will have a much greater impact on your final corpus ,than a fund with a lower expense ratio. But it doesn’t mean that a fund with a higher expense ratio is necessarily a bad investment.
  2. Exit Load – Exit Load is levied when you sell your units of a mutual fund within a particular time period; for most mutual funds it’s one year. In case of SIPs, a time period of 12 months is necessary to complete for each SIP instalment to escape the exit load. For instance, if you have invested in a SIP for 2 years, you need to wait 1 more year to get rid of the exit load. It is expressed as a percentage of NAV. Since it will impact your investment value, you should invest in a fund with a low exit load and more importantly stay invested for the longer term, specifically in the case of SIPs,
  3. Performance metrics – There are some key performance metrics one should look at before selecting any mutual fund scheme. Some of them are:
    a) Portfolio turnover – Portfolio turnover, expressed as a percentage is used to measure how frequently assets are bought and sold by the fund managers. It is calculated as lower of purchase and sales divided by the average AUM. Generally, a low portfolio turnover is desirable as it indicates that the scheme has been following a buy and hold strategy, and the fund manager has conviction over his stock selection. Moreover, a lower portfolio turnover would subsequently lead to a lower expense ratio and higher returns because of lower transaction costs.
    b) Sharpe Ratio – Sharpe Ratio is a measure of risk adjusted return of a fund i.e. how much excess return a fund generates relative to the risk taken. So, if two funds offer similar returns over a particular time period then the fund with a higher Sharpe Ratio would be an ideal investment.
    c) Information Ratio – Information Ratio (IR) helps in measuring the extra return generated by the fund vis-à-vis the benchmark in relation to the additional risk it has taken vis-à-vis the benchmark. Generally, a ratio greater than 1 would mean that the fund manager has a greater ability to generate excess return and outperform the benchmark.
    d) Standard Deviation & Beta – Standard Deviation shows the relative volatility in returns of a scheme vis-à-vis its historical average. Typically, a lower standard deviation implies lower fluctuation in returns from the historical average return. Beta measures the sensitivity of funds performance in relation to the benchmark i.e. by how much percentage a fund’s NAV will move for a 1 per cent change in the benchmark. So, if beta of a fund is 1.2, it means for every 1 per cent upside or downside, the fund’s NAV would move by 1.2 per cent.

One can research on the performance of various mutual fund schemes through online portals like Morningstar, Moneycontrol.com or even by downloading the FACTSHEET of a particular scheme of a fund house from their website.

So, from now on if you think to invest in a mutual fund, don’t forget to do a due diligence based on the aforementioned points. These checks will surely go a long way in helping you to choose the best mutual fund scheme based on your investment profile.

Remember, when you are investing in mutual fund, you are trusting someone else for your hard earned money!


Don’t forget to share with the friend, who is looking to invest in mutual fund!

How to invest in international stocks?

Recently, Apple Inc. was in the news for reaching market capitalisation of $2.0 trillion, which is more than 50% of India’s GDP. Bewildered by the hefty returns of Apple Inc., many Indian investors expressed their willingness to invest in the Company. However, shares of Apple Inc. are not listed on Indian bourses.

Before we move ahead with the ways to invest in international stocks, let us learn about the merits and demerits of investing in international stocks. If you look around yourself, you are surrounded with products of international companies. When you binge watch your favourite show on Netflix/Amazon Prime, on your Apple/Samsung smartphone, while sipping Coca Cola/Pepsi and having your Lays potato chips, you are unknowingly boosting the share prices of these companies. Have you ever considered that you could invest in these companies too, and earn handsome returns? If not, consider it now!

Portfolio diversification is one of the important feature of successful investing. In the Asian Financial Crisis of 1997, markets all across Asia suffered, in contrast to western markets. Hence, by investing in international stocks one can gain geographic diversification of the portfolio. However, sky is not always blue, i.e. there are some inherent risks while investing in international equities. The biggest amongst them is: currency risk. Apple Inc. is listed in the US stock market. So, to invest in Apple Inc. you need to first buy US Dollar and then use your US Dollar to buy shares of Apple Inc. You may incur significant loss, in case of exchange rate volatility and it may turn out to be a nightmare. However, since you are reading this post, you are willing to take that extra currency risk.

There are various ways by which you can invest in international stocks, and it doesn’t require a minimum ticket size; you can invest in international equity with $1 also!!! Nevertheless, there is a maximum limit of $250,000 (₹1.8 crores) as stated by RBI under Liberalised Remittance Scheme (LRS). Coming to the most important question now, HOW?

  • Indian Brokers: Popular Indian Brokers like HDFC Securities, Axis Securities, ICICI Direct, Kotak Securities, etc. have tie up with foreign brokers and offer Indian clients access to international stock markets. They may charge some extra fees or premium or brokerage for international equities, and hence one must go through the terms and conditions very carefully before proceeding. We don’t advise retail investors to use this method, as the costs involved under it may outnumber the returns. It is suitable for people who want to invest large corpus in international equity and have the requisite expertise.
  • Foreign Brokers: There are few international brokers, which have branches in India and give their client an option to invest in foreign market. Some of them are Interactive Brokers, TD Ameritrade, Charles Schwab, etc. These brokers are generally expensive and require a minimum amount in the investment account of the client. This option is suitable for fund managers and full time active traders.
  • Startup Apps: Exploiting the opportunity and interest of Indian investors, many new age startups have come with apps to provide access to international stock markets. Vested Finance and Webull App provides easy access to foreign equities. Although they are regulated and registered, their recency creates a risk factor. Hence, it is advisable to not put a large sum of money through these apps. They can be used for small investments, to just get a taste of international markets.
  • Mutual Funds: There are many Indian Mutual Fund Houses that offer dedicated mutual funds for international stocks. You can easily invest in them and get exposure to international equity. Some of these funds are: Aditya Birla Sun Life International Equity, DSP Global Allocation Fund, ICICI Pru Global Stable Equity Fund, etc. This is the best option for retail investors to get international exposure. Low cost of investing (no currency conversion and transfer charges) along with minimum risk (presence of a dedicated fund manager), makes this a popular option amongst retail investors.

So, next time when you tune into your Apple Smartphone with Coca Cola Can in your other hand, you are actually creating money for yourself.

Do share with your friend who wanted to invest in Google! #rare4share

Safe Harbour: This post is for education and awareness purpose only!

Bhartiya Economy!

All strange things are happening around the world currently. Gold and Stock markets which apparently have inverse correlation are moving north like best friends and there’s no halt, it seems. Amidst all this, another topic which is doing the rounds is the resurgence of the agriculture economy on the back of better than expected monsoon (India experienced the wettest June since 2013 according to the India Meteorological Department). One can also look at some of the agri-related stocks like Escorts, M&M, and Rallis India, to get a sense of investor’s optimism on this theme.
But, what’s perplexing, is that the Rural economy (popularly known as ‘BHARAT’) is going to revive the Indian Economy. This theory has gain prominence owing to data like tractor sales and motorcycle sales, which have been robust. Agreed, these are some encouraging signs, reflecting the drive in the rural economy, however here is a catch!!! Most of us assume that the rural economy is equivalent to agriculture, and hence believe that India’s growth story hinges on the revival of agricultural sector. But that shouldn’t be the case!

So, we have emulated some of the points to understand why BHARAT alone isn’t going to put back India onto the growth path.

  1. Rural is much more than Agri: In a note dated 20th July, Credit Suisse pointed out that the agriculture forms only c.29 per cent of the rural economy. The rest is the non-agricultural rural economy consisting of construction, manufacturing, financial services among others. In the last two decades, a bulk of new factories have come up in rural areas leading to job creation, and a gradual movement of people from agriculture to manufacturing, a more productive sector.
  2. MSME Conundrum: 50 per cent of the 63 million Micro, Small and Medium enterprises(MSMEs), which contribute to c.30 per cent of India’s GDP, are located in rural areas . That said, the pandemic has taken a heavy toll on their business, and banks, which were cautious of lending to them earlier, have become even more prudent. Moreover, out of the government’s 3 lakh crore package, 43 per cent of the total amount was SANCTIONED within the first 2 months of the announcement while disbursements as a proportion of total amount was only 27.35 per cent as on July 23.

Additionally, MSMEs play an important role in job creation in the rural areas owing to their widespread presence. However, as per Reserve Bank of India’s latest systemic risk survey, the MSME sector has been badly affected because of lack of cash flow, stuck working capital, lack of manpower, thereby affecting employment. The third national multi-institutional survey on MSMEs in India estimates that 25-30 million jobs had been lost in the MSME sector by the end of June 2020. It further estimates that another 10-15 million jobs will be lost by August.

  1. The tractor sales puzzle: Tractor sales in June was robust and was widely cited as a sign of rural recovery. There’s a saying “We shouldn’t judge the book by its cover unless we delve deep into it”. Same goes with the tractor sales. Traditionally, April to June is a tractor buying season and since April and May barely saw any sales due to the lockdown, June sales could just be a display of pent up demand. Also, one must acknowledge that tractors are too expensive for a normal farmer. In FY20, a little over 7 Lakh tractors were sold in India. Assuming an average tractor costs INR 5 Lakh, this amounts to around ₹35,000 crore. The size of the entire agriculture economy was at ₹32.6 trillion in FY20. At 1.07 per cent, tractors are an insignificant part of the overall agriculture economy and the increasing sales could mean that rich farmers are doing well. They don’t reflect the overall state of the rural economy.
  2. Spread of Coronavirus – Until now, it has been said that rural has been much better off than urban amidst the pandemic. However, post-June Covid-2019 is now spreading beyond India’s big cities to Tier-3/4 cities. And if it spreads deeper into rural areas, it could very well be a speed-breaker to the rural momentum. Moreover, different states have different medical infrastructure and thereby a limit to which they can manage the pandemic effectively, and with state finances in a dwindling situation, the government will have no other option than to reinforce local lockdowns.
  3. Declining share of agriculture – The share of agriculture in the total GDP of the country has been on a long term downtrend; falling from the peak of 42.77 per cent in1967 to 21.61 per cent in 2000 to 15.96 per cent in 2019.

From the aforementioned points, one must acknowledge the fact that BHARAT alone isn’t going to revive our economy,. Rather, it should be a combined effort of all the major sectors to restart India’s new growth phase. And, amongst all, Service sector would play a very dominant role because of its lion’s share in India’s GDP at 49.88 per cent in 2019, rising from 45.98 per cent in 2009.

Source: Livemint, statista.com, theglobaleconomy.com

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UPI – India’s Digital Kohinoor

Unified Payments Interface, popularly known as UPI, has undoubtedly become India’s most popular payments system. Launched in April, 2016 by NPCI, UPI is an immediate real-time mobile payment system, regulated by RBI. UPI connects multiple bank accounts with a single mobile application, that allows users to make immediate payments round the clock. UPI works on simple user interface, that allows customers to link their bank accounts to multiple peer-to-peer (P2P) payment apps (Google Pay, PhonePe, BHIM, PayTM, etc.).

Baffled by the success of UPI, Google in December’ 19, requested the US Federal Reserve Board to built similar mechanism in the United States, to be known as “FedNow”. European nations are not far behind, they are also working to create similar infrastructure in their country, particularly the UK. NPCI (National Payments Corporation of India) has also received requests from Brazil, Singapore and Bahrain about the working of UPI. Unlike the diamond one, even though world takes this Digital Kohinoor from India, the country won’t be deprived of it.

In the previous month (July’20) UPI recorded 1.49 billion transactions , which is more than the total population of China. A total of INR2.90 lakh crore worth transactions took place via UPI in July’20. To give an idea, the amount of transaction via UPI in the month was 30% more than entire GDP of Nepal. In October’19, i.e. just 3 years since inception of UPI, 100 million users were registered on the platform, making it the fastest adoption of any payment system in the world. User base of UPI is expected to reach 500 million in 3 years. Today. more than 50% of all digital transactions in the country are routed through UPI.

Aggressive expansion of UPI was led by India’s three major payment apps; PayTM with an active user base of 140 million, followed by Google Pay (67 million) and Phone Pe with (55 million). There are several other factors which led Indian households to own this Digital Kohinoor, explained below:

  1. Demonetisation of 2016, was a major push towards India’s digital economy, of which UPI was the prime beneficiary. Popularity of e-payments have increased since the country’s drive to denounce the beloved currency notes (Although forcefully).
  2. Simple, safe and hassle free nature of UPI allowed it to become the leader in electronic payment space. Unlike NEFT, IMPS or RTGS where in users have to face tussle between passwords and OTPs, UPI allows the transaction with a simple 6 digit PIN without compromising on security.
  3. Indians love free products and services. UPI is one such free service. Customers do not have to pay any transaction or annual fees for their receipts and payments via UPI.
  4. Speedy adoption of UPI by banks. There are now 164 banks live on UPI, compared to 21 at the time of inception. UPI is now available on all the internet banking apps offered by commercial banks.
  5. Interoperability was another tailwind for UPI’s dream run. RBI’s interoperability mandate allowed customers to make and accept payments from users of different payment apps. The interoperability creates healthy competition between rival payments providers (both domestic and international) in a bid to secure the loyalty of their customers.
  6. Transaction limit of up to ₹2 lakhs also made it suitable for small businesses to make and receive big payments via UPI.

The outbreak of corona-virus pandemic has also proved to be a “precious jewel on the venomous toad” for UPI, which encouraged contact less transactions. Further, we believe India’s young demographics and entrance of WhatsApp Pay in the UPI ecosystem, will further enhance the glitter of Digital Kohinoor.

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Source: NPCI, Penser, ENTRACKR

Private Capex: An inside story

With Gross Fixed Capital Formation (GFCF) as a proportion of GDP around 31 per cent during 2017-18, Private sector investment has been and will continue to be one of the important pillars of GDP growth, and why wouldn’t it be so, given its multiplier effect on the economy in the form of creating job opportunities, boosting employment, increasing consumption demand and so on.
But sadly, over the last one year or so, this component of GDP growth has taken a heavy beating and private investment by companies have been falling to multi-year lows.

The Modi Government was well-aware of this fact and in September 2019, it took the entire country by surprise when it announced a sharp cut in corporate tax rate. The move was aimed to boost manufacturing and encourage businesses to expand production capacities, thereby hoping for a revival in private sector capex. Additionally, the RBI also did its part by slashing interest rates by as much as 250 bps between February 2019 and May 2020 and coordinating with the banks to improve rate-cut transmission.
The move, to an extent paid off, with the MCLR coming down by 104 bps over the last 12 months when the rate cut was to the extent of 150 bps.

Prima facie, it seems that not only the nominal rates would have come down, but real rates as well. So, a lower real interest rate should have invigorated businesses to borrow more and make new investments. But is something like that happening?
Private capex has been on a southward journey in FY20; from 4.6 per cent in Q1 to (3.9) per cent in Q2 to (5.2) per cent in Q3 to (6.5) per cent in Q4.
But why is it so?
Yes. We know your answer: it’s because of COVID-2019 pandemic. But the pandemic started spreading in our country only after March.
There’s something which we are missing!!!
It is because of the way we treat inflation rate in our calculation of real rates. Theres’s a common perception that “inflation rate” means retail inflation (CPI) in the economy. This is 100% true for consumers but not for businessess. For example, a steel manufacturing company would have little to do with what the inflation in fruits and vegetables are. It will be more concerned with the wholesale inflation in steel.
Looking at the wholesale prices gives a sense of the “pricing power” that a firm or industry enjoys. The pricing power varies between businesses – steel, consumer durables, hotel, aviation depending on their industry scenario and product demand.

So, to gauge inflation for businesses, one should look at Wholesale Price Index(WPI) and within WPI – the non-food manufacturing inflation, also called the Core-WPI.

Source: Bank of America Securities
WALR: Weighted average lending rate

Charts 1 and 2 show what happens to the real interest rate for businesses when we calculate it by using core-WPI as the inflation rate. It can be clearly seen that the real rates have moved north since Dec-2018 (Also the month in which Shaktikanta Das took over as the RBI Governor). This has been a significant factor in deterring businesses from making investments.

Now, with the Covid pandemic the situation has become even worse for the businesses, with an uncertain and bleak future outlook. In about a week’s time, the Monetary Policy Committee will reconvene to take decision on interest rates. It would be interesting to see how the RBI deals with the above dilemma and help the corporate sector come out from the double whammy impact of high real rates and Corona virus.

Source: The Indian Express

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