Thursday, July 10

Why do my investments or finance need revision?

' You need to have a relook at your investment portfolio!'
That's what every Tom & Harry, newspapers, so-called finance advisors, probably even the "parrot" astrologers say these days! How true is it? How different is the scenario now ? How does US mortgage issues affect a common man in India? (A woman is never common as she is always special :-) )
Let me try explaining in lay man's term (In my MBA exams, I had to use all jargons and even formulae while answering any question, to get those precious marks! Thank God that blogging has made life easier. lol )

Well, the major difference between the good old times and the current struggling period is that there money supply in the system is reducing and more money is being absorbed into the system by RBI. In economic terms, there was more money chasing the goods and supply went up more than the demand. To set this balance right, Govt. has evoked measures like increasing repo rate , CRR(Cash reserve ratio) which influence or force the common man and special woman. What do they respond? They are intended to consume less and save more or invest more. And with the stock exchanges being ripped apart and real estate facing its sickening corrections, the best choice is to go for debt instruments as they are more attractive. i.e. We are giving back the monies to the banks as deposits or govt. bonds to get higher returns and in economic terms, money is being sucked out of the system. This will go on till the balance between D&S returns.
If this sucking continues, there will be a stage when there is not enough money in the system to meet the demands; This is when we can say that the cycle has reached its switch-over state. Then, a good govt. will arrange for pumping the money back into the system. How? This can be achieved by doing exactly the opposite - reducing the interest rates for term deposits and making loans feasible. Now the common man is attracted to consume more and save less thereby releasing more fluidity.
Its a simple carrot and stick trick, only that there are causalities to the common man.

But why? As one can easily imagine, this is a cycle and as per natural laws,it has to go through its full cycle, even though the radius (i.e.timeperiod) can be varied depending upon other macro-economic factors (like inflation, GDP growth, Govt. policies, global impacts etc). Talking of inflation, it is an indicator of changing times and rings the bell to the people and opposition parties alike.

This scenario can be thought of as a chemical equation where the atomic number and mass number of the elements/compounds on both sides should match for any stable reaction. Add to this equation, the impending general elections and thereby populist political behavior and expectations as catalyst.
But all those who have studied chemistry know that there is an exception to this rule which is the release of energy to equate the both sides!

i.e. Nuclear equations - That is the icing to this cake and definitely not the UPA !

No comments: