Happy Diwali – with some Updates

On the auspicious occasion of the festive season, I would like to wish you all a very happy and prosperous Diwali. Hopefully Goddess Lakshmi would fill your purses with gold and prosperity.
I would also like to take this opportunity to update you with the recent developments and its aftermaths. Nothing has changed materially since the last time I wrote to you. Global worries are still there – European sovereign crises is now there in every day’s news papers with rating agencies like Moody’s and S&P being a bit more proactive this time and are taking every possible opportunity to downgrade the credit ratings of every possible corporates and governments. This time they don’t want to take any chances whereby people would question their ability to forecast the deteriorating health of companies and countries. After all they played an important role in the credit crises by not reflecting the right credit rating of companies !
On an another note to make things interesting for NRIs – they would be finding that they are getting excellent exchange rates to remit funds to India and probably many of them would be using this opportunity to remit and invest into India. $ at INR 49-50 and £ at 79-80 levels is really mouthwatering for them. While this helps NRIs and Indian exporters, it is acting as a big drain on Indian importers. India is a net importer and the biggest import is Oil. Oil importers would have to pay extra to buy the same quantity of Oil and hence fuelling the inflation levels in India.
While touching upon Inflation – Reserve Bank of India is trying its level best to tame Inflation by keeping interest rates at almost historic highs. But how is interest rates and inflation linked ? Higher interest rates makes borrowings expensive. This would discourage consumers to borrow in order to buy products and hence reducing the overall demand for the products in the economy. For example, would you buy a TV and you had to borrow at 12% interest ? Consider if you had the same TV but the interest rates were just 2% ?
If demand slows down with the same level of supply of products, it would result in the lowering of prices and hence the inflation. On the other hand, higher interest rates also induces people to save and invest, rather than spending. This again results in less spending and also slows down the demand. This all sounds positive huh? However, there is a negative side as well. Higher interest rates makes borrowing expensive. Corporates who are borrowing more would be making more interest payments and hence lesser profits. Lesser profits will drive down their share prices and hence the value of your investments. This is probably going to happen for next 6 months – 1 year. The impact would be more on Companies who borrow more than the Companies who are debt free.
But then there is a benefit in disguise. Long term investors who are continuously investing will have mouthwatering opportunities to buy more shares / mutual fund units at cheaper rates, hence bolstering their long term growth prospects. Hence my sincere advise to all of you would be to keep investing without expecting any short term returns. Short term returns indeed give a big satisfaction to one’s heart reflecting that the investments are infact doing what they were started for. However, not having short term gains should not be considered that your long term gains are getting jeopardised. Infact it may be opposite. If you are investing on a regular basis, short term gains would reduce the opportunity for longer term gains.
Hence hold on to your guns ! Be as excellent and patient as you have been in the past.

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