DOES INVESTING IN EQUITIES AFTER A RATE CUT, RESULT IN RETURNS?

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RBI governor Raghuram Rajan surprised the economists, analysts and markets with a higher than
2expected Repo Rate cut of 50 bps on 29th September 2015.

He clearly warned of slowing down of world economies and India can take advantage because of Demographic Dividend and Demand as a result of it.

The 1-3-5 years CAGR Returns of Sensex after a RBI Rate Cut shows that investors have got handsome returns. Can we say today, that investing now, can ensure a handsome return??

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Liquidity is a measure of the ability and ease with which assets can be converted to cash if needed to meet financial obligations. Banks play a central role in all modern financial systems. To perform it effectively, banks must be safe and be perceived as such. The single most important assurance is for the economic value of a bank’s assets to be worth significantly more than the liabilities that it owes. The difference represents a cushion of “capital” that is available to cover losses of any kind. But, stress also needs to be given to the importance of a second type of buffer, the “liquidity” that banks have to cover unexpected cash outflows. A bank can be solvent, holding assets exceeding its liabilities on an economic and accounting basis, and still die a sudden death if its depositors and other funders lose confidence in the institution. Liquidity conditions were generally tight during Q1 of 2015-16 mainly due to restrained government spending. In Q2, however, liquidity conditions eased significantly as public expenditure picked up and deposits exceeded credit substantially.

Liquidity in financial market is important. Current easing in repo rate and future easing of SLR will increase liquidity in system.

Bank Credit growth has not picked up and the main reasons are high interest rates, lower capex and corporates borrowing from capital markets. With RBI Governor’s comment that someone else is eating your pie, Banks are under pressure to reduce lending rates. This can unfreeze the credit markets, decrease the cost of servicing debt and thus reduce NPAs.

 EFFECTS OF RBI POLICY

  • The decrease in Repo Rate, which will be partly passed on to consumers, will result in lower Interest rates for new and existing loan takers. This will result into more money.
  • The SLR cut of 0.25% per quarter will translate to ~₹ 22,500 crores additional funds for the banks per quarter. This will mean more amount for funding projects on the ground.
  • Cheaper interest rates, will result in the industry borrowing funds at cheaper rates or decreasing their current interest outflows on existing loans. This will help the stalled projects to kick-off.
  • The Jan Dhan Yojana scheme has pooled in ₹ 19,800 crores, which can be used by banks to increase loans.
  • The Direct Benefit Transfer of subsidy for LPG connections has helped the government save ~₹ 12,700 crores.
  • The total loans payable to bank is ₹ 61,59,168 crores. If even 0.75% of the Rate cuts is transferred to borrowers- it could lead to a saving of ~₹ 46,194 crores.
  • The Small Savings Schemes have a total of ~₹ 5 Lac crores in the kitty. A decrease of 0.10% in the rate of Interest will translate to a saving of ~₹ 500 crores p.a.

These savings may get translated into investments moving into the Financial Markets.

INCREASE YOUR SIP & INCREASE ALLOCATIONS TO EQUITIES WITH A 5 YEAR VIEW!

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Sapient

Disclaimer: This document is meant for private circulation only. Sapient Wealth Advisors & Brokers Pvt. Ltd has taken due care while compiling this report. All information/opinion contained/expressed herein above by SWABPL has been based upon information available to the public and the sources, we believe, to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Readers should use this information at their own risk. SWABPL shall not be held responsible for any direct or indirect loss caused by relying on this information.

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