Cut in interest rates alone would not revive economy; consumer confidence will

A big cut interest rates by the RBI, this time, is going to be transmitted by the banks in somewhat equal measures to the borrowers, just because government wants it so.

On earlier occasions , while the RBI had reduced the policy rates , not even one-third was passed  on to the borrowers who continued to pay same amount of EMIs for their housing and car loans . So, for the borrowers, every time there was cut announced by the RBI , it was just an academic exercise alive for a day or so.

In the mean while, the analysts and commentators would blast Governor Raghuram Rajan for being too conservative and obsessed with inflation without bothering for growth.

But, now that the  majority owners of the banks, that is – government has “ nudged “ them, the banks would fall in line. The worst is that the banks had got their Repo reduced, dropped  the deposit rates but did not cut the lending rates, increasing their own margins. Despite that, their NPAs went on piling up….Blame whomsoever, you may like…but this is not the way banks should be run.

This time as well, while the deposit rates have already been cut considerably in the last one year,  there is a clamour for reducing the interest also on small saving instruments like NSCs, PPFs.  So, the small savers’ loss becomes gain for the big time industry, borrowers, banks ……great economic this is! 

The industry keeps on making demand for an interest rate cut; as if  that is the only trouble with the lack of investment and demand. If that was so, Europe, Japan and the US with almost zero interest rates , would have been in boom; but they are battling slowdown, bordering on recession.

Yes, the stock market got a boost from a 50 bps cut in interest rates; today's rally is more in line with global cues - most of the Asian markets are in the green from overnight gains Dow Jones and Nasdaq.    

Investment is also a function of consumer demand, which is not always created by cheap interest rates. Not all consumers borrow to buy goods or properties. Bulk of their consumption is met by their own earnings, and savings which in turn depend on the kind of employment, quality of employment and prospects of growth.

In a way, it is a chicken and egg story; but then as has been proven time and again, you cannot live on borrowed money for too long and too much; there must be earnings and savings…..Let us avoid one-sided debate on interest rates, only from borrowers’  point of view. 

Glencore is not Lehman Bros, but retail folks must stay away- no buying opportunity is this

Crash in commodity giant Glencore’s  share price has made people wonder whether it is a Lehman Brothers moment.  Do not think so. Investors need to hold their nerves, but stay off completely from buying even if the experts tell you about the so-called buying opportunities. But yes, Glencore is a classic case of over –leveraging your resources and trying to be “over smart” in the trading arena.  

Everybody thought Glencore had some of the most sophisticated trading desks and could go on excess borrowing without making a mistake. The Anglo-Swiss resource firm thought it was a trend – setter, which it was not.

In case you, as retail investors,  have just entered the market a day or two ago and your stop loss has been breached, just get out of the market and relax; otherwise the losses could be much bigger.

In the market anything can happen. Even if the markets turn for better, it is not going to be a consistent and stable trend, at least for now. I can bet on that.  

For retail folks, this is time to be sitting on a cash which may be parked on short tenure fixed deposits    with banks even if RBI cuts rates.

These financial honchos of the world  must listen to traditional Indian Marwaris who will never borrow beyond a point even if it means missing an opportunity. The trouble is that in the financial world , everybody , including the most sophisticated  ones gets carried away when going is good. Bull run brings in more bulls without caring for the bears who can then bring in a devastation.

Why did I say, Glencore would not be Lehman Bros? It would not lead to any major bank collapse. Plus, the 2008 crisis came on the back of a good run. Now, we are in the bad run, in any case. So, it would be one more big hit that would certainly delay the recovery.

All this talk of India Story, this story , that story  by Marketwallhas is a bull !

So, the market is down, but we are in the midst of diehard optimists who will irritate you by all kinds of jargons – India growth story, India bright spot, demographic dividend , stay invested and so on. You get even more irritated  if you have lost money and these guys, some of whom are stars of sorts in the business press,  come and advise you how in the long run, money put in the stock market is safe and more rewarding.  These people must answer first how long is the  long run when it comes to those investors who had put in money in Reliance Power, DLF, Unitech, JP Associates, and even recently Tata Motors . There are thousands of penny stocks where investors have burnt their fingers. Then there are stocks in the hotel industry which have lost 30-40 per cent in the recent past.

My take: Do not listen  to them when they tell you :  it is the best time to buy. In fact, nobody knows when is the best time to buy. Then when should we buy ? This so called contrarian view of buying when everybody else is selling could be quite risky for middle class investors who have hard earned money .  Keep it simple: Buy when everybody else is buying, especially when the big guys are buying. I mean –move with the momentum with a certain stop loss.

Put simply, it is not possible that every time you buy a stock , it is bound to go up; it might reverse immediately after you have bought. Then, even before investing, be prepared to suffer a small loss , known technically as stop loss. FOR GOD sake, respect this stop loss and get out of it , come what may if this stop loss is breached…. Your risk would be just limited. But if you move with the momentum when things improve….chances are your stock will go up to a limit ….but every time, it moves up, keep shifting your stop loss….there is no reason you will lose..

Leave this India story business to these high heeled investment gurus who just want to see the retail investors trapped.