Your monthly financial decisions depend a lot on a host of economic indicators.
YOU may have your day job that has nothing to do with financial markets. But there are enough reasons to track a handful of economic indicators because they will influence your life. It could either impact your saving, spending, investment or even your future job prospects or hike in salaries. For example, you would have seen at least 30% spurt in your grocery bills for the past few months. It's an impact of food inflation, which rose to an 11-year high of 19.95%, for the week ended December 5, 2009.
Most of your monthly financial decisions such as providing for your home loan EMI, child's education or something as basic as daily consumption of milk are largely determined by these economic parameters. So, it pays if you make future economic decisions in a macro economic context.
INFLATION
Inflation gives you an indication of the actual value of your money. Knowing how much more you are paying this year is useful, but this information is far more useful in making long-term plans to get an idea of the kind of savings you will need for retirement. For example, you could watch a movie for 20 paise in the 1960s, but you will have to shell out Rs 200 for the same today. That's the effect of inflation. In India, inflation data is announced by the commerce ministry every Thursday. India is possibly one of the few economies which still follow WPI (wholesale price index) instead of CPI (consumer price index), which has less relevance today. You should look at components such as at primary articles and fuel items, which have a direct impact on your disposable income. The demand for basic necessities for food is inelastic to price rise. Hence, even if the food prices go up, it would eat into your savings as you cannot cut down beyond a point on such needs.
On the saving side, it eats into the value of idle cash lying in your bank account. The annual return of 3.5% can actually have a negative value, thanks to the double-digit inflation. Similarly, on investments you have to compute the real rate of return to assess the impact of inflation. Fixed deposits, PPF or NSC assure safe returns but are not capable of beating the inflation. Real estate, gold, and equity are considered good hedges against inflation on a long-term basis. Whenever you invest in an instrument, compute the future value after accounting for an inflation of 8-10% to get accurate results.
It's crucial to provide a certain mark-up at the planning phase itself. For retirement planning, every individual has to do a certain loading on the numbers today based on their lifestyle to get the required future value. Again, this loading has to vary from period to period so as to reflect true value.
GROSS DOMESTIC PRODUCT
The Sensex must be increasing by the day, but is this rise sustainable? To get an answer to that look at the GDP numbers. Contributors to the GDP include the private sector, the government and agriculture. If the GDP grows, it is most likely that the private sector will grow since agriculture and government are unlikely to grow significantly. The Reserve Bank of India gives an estimate for GDP in its annual monetary policy statement (in April) and reviews the same on a quarterly basis. GDP is a manifestation of economic activity, which encompasses agriculture, industrial output and services. As technical as it sounds, GDP also gives an idea about future jobs prospects and salary hikes. Whenever GDP increases, the per capita income of the individual rises. In 5 years (2005-09), the per capita income rose by 32% to Rs 26,000 backed by GDP at 8-9%. Higher GDP not only reflects better prospects for existing working pool, but enhances the economy's capacity to create jobs.
CRUDE OIL PRICES
On the face of it petrol prices in India are fixed by the government and crude prices should not bother us. But bear in mind India imports 70% of its crude oil requirement, which includes industrial use as well as personal consumption. Hence, any change in these prices could push up allied costs. However, at the individual level, the oil price is still regulated by the government, which insulates common man from drastic hike in prices. But a global rise in crude oil prices could spur the inflationary pressures, which would push up overall cost of living.
EXCHANGE RATE
If you are working for an export-oriented company — IT or textiles — this is one indicator that will affect you directly. The earnings of an export-oriented company can go down by 10% a year without any drop in sales if the rupee dips from 48 to 43.2 against the dollar. Exchange rate information is available on RBI and CCIL websites. Exchange rate can be interpreted at two levels. The one is related to foreign trade, in which the exports and imports translate into a local price fall/hike.
INTEREST RATES
The most common complaint with a hike in interest rate is a higher home loan EMI. This implies a lower investible surplus, lowering your consumption or scaling down of your lifestyle. However, it could be good news for deposit holders if the deposit rates are hiked in tandem with lending rates. You can get advance intimation of such interest rate movements by watching out for RBI action in monetary policy. If you are expecting the rates to increase in the coming years you can advance the leveraging by buying your house today. However, you should ensure you have the necessary funds for downpayment of the house.
