Home / Opinion / #DeMo dust will settle, but belt up for 2017

This year will be remembered for the contradictions of the post-war world order manifesting in many ways. If 2008 was when the crack became visible, 2016 was when the fissure became too big to ignore. A series of global events point to the rising voice of those left hurting by rising inequality in the world economic order, where the benefits of globalization have gone to capital rather than labour. Labour as one of the factors of production—land and capital being the other two—has suffered. Real wages have been stagnant in the developed world and restrictive labour mobility rules have hurt labour in the emerging world. The rules set by the owners of capital make for a world without borders for capital, but not for labour.

These macro and global events translate into our lives through an impact on employment opportunities and asset prices.

As India gets better integrated into the world economy, we share the pains and gains of major global events, and influence some of them as well.

In India, we saw visa rules get tighter for work in the UK. A Trump-led US is expected to clamp down on skilled worker immigration. We saw prices of gold, stocks and bonds rise and fall due to both local and global events. Take the price of gold first. The year is ending with global pressure on gold prices due to a strengthening dollar as the US Fed continues with its higher interest rate policy. Gold prices globally would have fallen more than they have had India not stepped in to buy.

Post-demonetization, gold demand spiked as there was a rush to turn cash into gold. But that demand has levelled off. Whether black money holders in India are able to figure a way to convert cash into gold without losing too much in the process is still to be seen. If they do, the fall in gold prices will have a floor.

As the US continues its rate hike programme, India has carried on with interest rate cuts, with rates reaching a 6-year low of 6.25%, down from 8% just a year ago. With inflation targeting now the goal of India’s central bank, there has been much greater focus on getting prices under control.

India will now target an inflation rate of between 2% and 6%, with 4% as a near-term target. Lower inflation has translated into lower policy rates, which have been transmitted to lower deposit and government small savings rates. The State Bank of India (SBI) 5-year deposit rate has fallen to 6.5% by the end of 2016, down from 7% in January this year. This is 250 basis points down from a high of 9% in October 2013.

The small savings rates are now more market-linked and are changed every quarter. The Public Provident Fund (PPF) rate fell from 8.7% a year ago to 8% in October 2016. The rate announced for the Employees’ Provident Fund (EPF) is 8.65%, down from 8.8%. This rate is yet to be notified.

Though falling deposit rates worry fixed income earners, especially those who are retired, what we forget is that in real terms, lower interest rates may be better if inflation rates are down.

Consumer price inflation peaked at the end of 2013 and breached 12%. A 5-year deposit at 9% was burning purchasing power when inflation was 12%. Today, with CPI down to below 4%, a fixed deposit rate of 6.5% gives a real pre-tax return. Banks have transmitted lower interest rates to their deposits but not their loans. Lending rates have not come down proportionally. The SBI base rate has fallen only 70 basis points to 9.3% in December 2016 from 10% at the end of 2013. One basis point is one-hundredth of a percentage point.

Next year should see better transmission, especially as demonetization has caused bank deposits to soar.

Stock markets faced upward in 2016, till the 8 November demonetization announcement. This is an external shock and will play out over the next few quarters. The real story is the reduction of the sensitivity of the Indian stock market to the flow of foreign institutional investor (FII) money.

The past few years have seen a contra move by domestic institutional investors, such as mutual funds and insurance firms. The National Pension System (NPS), and now the EPF money, adds to this pipeline of domestic money that somewhat insulates the domestic market from global volatility. The net FII investment in calendar year 2016 has been Rs22,433 crore. DIIs have invested about Rs31,516 crore.

Retail investors in India have historically bought high and sold low. The innovation by the mutual fund industry of using a systematic investment plan (SIP) to allow for rupee cost averaging is inculcating the habit of regular retail savings in equity through the mutual fund route. The SIP book is bringing in between Rs3,700 and Rs4,000 crore of retail money each month to the stock market.

The asset class that got what it deserved has been real estate. Stagnant prices over the past few years have meant a real price decline due to the bite of inflation. Several things have worked to freeze the real estate market. Dubious builders, delays, sharp sales and just plain fraud caused a rising wave of public discontent that resulted in demonstrations and court cases against builders. The real estate Act has put curbs on the unlimited power of the builders and given consumers some rights. The final nail in the coffin has been demonetization.

Real estate and gold are sumps of black money in India and any move to attack corruption and black money will cause the value of real estate to fall. A reflection of the weakness in the sector has been the sudden silence of landlords who would otherwise hike rents each year. Rents have been flat or declining and now is the time to get your landlord to carry out the repairs and painting you have been asking for—the tenant is suddenly in a better bargaining position than before.

What lies ahead? Next year could be scary. There are both global and local events that point to uncertain times. If the current world order cracked in 2016, then 2017 will be the year in which the debris will fly around. In the face of risk and uncertainty, what should you do? If you did not have a plan for your money, get one. Without a plan you are vulnerable to all kinds of snake oil salesmen. It is not expensive. Find a financial planner and build a base to your financial life. If you are already on a plan, review and then stay with it.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, and on the board of FPSB India. She can be reached at monika.h@livemint.com

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