Two things are expected of the RBI today, in their monetary policy statement. One, that it will not raise interest rates – a stance taken already in end November in their mid quarter review – or actually cut rates. Second, that it will effect a cut on the Cash Reserve Ratio (CRR) from the current 6%.

Given the Macroeconomic statement yesterday, it doesn’t seem like both are likely.

on Inflation:

While growth outlook weakens, inflation risks remain

• The Growth outlook has weakened as a result of adverse global and domestic factors. However, inflation and expectations of inflation remain high and upside risks emanate from exchange rate pass-through, revisions in administered prices and higher-than-expected government revenue spending. Consequently, monetary actions will need to strike a balance between risks to growth and inflation.

• Growth in 2011-12 is moderating more than was expected earlier. The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13.

• While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address supply bottlenecks, this will be, at best, a temporary respite. In addition, the expansionary fiscal stance has emerged as an upside risk to inflation.

And later

Inflation is trending down, but upside risks remains significant

• Inflation is moderating led by sharp decline in food inflation and is broadly in line with the 7 per cent projection for March 2012.

• Primary food inflation declined sharply reflecting seasonal fall in vegetable prices and high base. However, as protein inflation continues due to structural demand-supply imbalances, the decline is expected to be short-lived.

• Inflation in non-food manufactured products remains persistently high, reflecting input cost pressures, partly resulting from the rupee depreciation that has offset the impact of softer global prices of some commodities.

• Upside risks to inflation persist from insufficient supply responses, exchange rate pass-through, suppressed inflation and an expansionary fiscal stance.

When you hear language like this you don’t think “repo rate cut”. You think, “wait and watch”. The language for repo rate cut is - “Growth has moderated significantly while inflation risks are benign”.

On Liquidity – that it is too tight will mean that they will cut CRR:

Monetary growth keeps pace even as money market liquidity tightens

• Money market liquidity tightened   significantly   since   November 2011 partly due to dollar sales by RBI. However, monetary growth has kept pace with projections, on account of a rising money multiplier. The liquidity stress was handled by the Reserve Bank by injecting liquidity through open market operations, including repos under the LAF.

• Credit growth slowed below the indicative projection due to demand as well as supply side factors. Demand for credit weakened in response to slack in real   activity. Supply also slowed down with rising risk aversion stemming from deteriorating macroeconomic conditions and rising non-performing loans.

(Emphasis mine)

What they mean is that liquidity is tight not just due to the economic tightening but due to the selling of the dollar by the RBI (which takes rupees out of the system). We don’t know the extent of that selling yet. Therefore, the OMO auctions – where the RBI pays rupees and buys government bonds – is essentially replacing that lost liquidity, and until they fully replace it RBI won’t really know how bad the situation really is on the liquidity front.

Overall, the CRR cut may not happen (such things are never temporary) until the RBI is reasonably sure that the liquidity issue is beyond what the RBI is doing by intervening in the forex market.

I may be wrong. We’ll know in 15 minutes.

In my first post, I’d asked what you would do if you lost your job. Not too many responses came about, and I think that’s because people don’t think such a thing will happen to them. But obviously they all sympathize.

I won’t claim to be different. There are just a few things that come to mind.

That Emergency Buffer

You need six months of expenses. I would even say a year.

And don’t get stingy with expenses. Don’t take the month of November and say I spent just Rs. 35,000 this month, so one year = 35K * 12 = <whatever>. You have a number of one time expenses or those that don’t reflect in November. Annual holiday. School fees. Insurance premium. Car maintenance. Medical bills. That TV or mobile or laptop you buy every year. All that, added up.

This money needs to be liquid. Either in fixed deposits or liquid/short-term debt funds.

If you don’t have this buffer in place, don’t go around thinking of which SIP to make or which equity fund to invest in. Build that buffer first.

Planning for desperation

If you don’t have that emergency buffer, then you’re desperate.

If you had that buffer and it is close to running out, you’re desperate. If you have a buffer and have cut through it slowly, reducing your discretionary spend so much that you are left with just absolute necessities, you’re desperate.

In times of desperation you will need to take whatever job you get. The ego of salary parity with the last job, or the same designation, all that goes out the window. I have had to acknowledge a situation of desperation in the past, and I know I was unprepared. If there is a next time I’ll recognize the signs better and spend less time in denial.

Through my bachelor life, I didn’t care about losing my job – even if I worked at a company I owned. (Oh you can lose those too). The thing is – I was employable, and I didn’t think the economy would tank, and that I would always be able to get a job. Because if it comes down to it, I would work harder, longer, and smarter than enough people to land a job. It’s remarkable how much more confidence you can get if you will take any job, any role, any designation.

What if you still don’t get a job? You have to be able to borrow. After all, people still need to eat and live and clothe themselves.

Preparing to Borrow: The OverDraft Account

Borrowing from friends or family is okay, and is used often. Moneylenders are the last resort – they charge 2% to 4% per month, usually with collateral.

But there are other, more reasonable avenues. If you are a low debt person, then you can borrow against securities you own, or a property, or gold, or even your endowment insurance policies. For this, you can set up an “overdraft” account that will give you access to money if you ever need it.

The overdraft is like this:

• You give your collateral – the car, shares, whatever.
• The bank opens an overdraft account for you with a “limit”. This is a new empty account of sorts, which you can “draw” money from.
• You can issue cheques from that account (or the bank might give you a debit card or netbanking transfer facilities)
• When you get money to pay back, you just put the money back into this account, even partially.
• You get charged interest only for the amount drawn, for the period it is overdrawn.
• They usually charge you processing fees of 1-2% of the amount, and then 0.5% per year. So it may be expensive to set it up in good times. If times get really bad, there are chances that such products will not be available to you. It’s a trade-off.

So if you need Rs. 1 lakh for a month, and then pay back Rs. 75,000 next month and 25,000 the month after, you get charged interest on:

• Rs. 100,000 for one month
• Rs. 25,000 for the second month (outstanding after you paid back Rs. 75,000)

The OD will help you get access to cash fast, should you get desperate. The interest costs can be 18% or more – but in a crisis, such accounts are really valuable.

Remember, you still need to pay the interest on the OD every month. If you haven’t maxed it, you can just take the sum out of the OD and pay it back as interest.

Fighting fit, with a break

If you ever get fired, consider taking a month off. You can’t be in such a bad shape that you can’t take a single month off. Get out there and do things you’ve always wanted to do but never done, like watching at 12 noon movie, or climbing a mountain or what have you.

And then come back with a vengeance.

Starting up…

…is not something you do until you find a better job. The lure of the tag, of starting something, is attractive. And even more so now with all the hoopla around it, the events, the prizes, the fact that some people get funded by Venture Capitalists for just breathing and so on.

Starting up is a life decision. You trade a cash flow (salary, or annuity) for an asset that you hope will appreciate, and eventually provide cash flow or get bought by someone bigger. Big success stories are rare, and the stress takes a lot more out of you than a regular job will. No, a startup isn’t what you do between jobs. It’s what you do because you want to do it.

I left my second job in 1998 – because I wanted to start a company, which I ran for seven years. It’s what I wanted to do. I was not immensely successful, but if you put me back there, I would still start up again. I’ve been on my own the past two years hunting to make the next venture a success. It is a full-time job, not something I think of as a “hobby” or “pastime” or “temporary designation”.

What about those EMIs?

If you can pay, pay. If you can’t pay, you can renegotiate with your lenders, asking for some time to pay the money back. Get all your documentation in written – if you are making phone calls, record them. Escalate matters to the highest official possible.

Lastly, if you have to stop paying, be prepared that the lender will repossess what you borrowed against (your house, your car etc.).

But remember that a default will hurt your credit later, as the lender will enter a note into your CIBIL record. So default at the risk that you may not get a loan again easily.

Do not fear, though. Banks are going to be just as worried about you defaulting, if there is a crisis and too many people have lost their jobs. You can use the situation as leverage to get the best deal that you can. (Don’t be ashamed – the banks will rip your heart out if it was legal.)

EMIs are necessary, but there are various options to change them – you can back-load them (pay more interest and principal after a couple years, pay lesser now). You can ask to only pay interest for a few months before you resume paying the principal. Only as an ultimately desperate person will you ever sell your house to pay off the bank – and you can set up your options so that you’ve tried everything else.

Why aren't you telling me to cut expenses?

I could, and this is advice you will get all over the internet. Cut your expenses, hunker down, don't eat out, sell the car and take public transport, change clothes only every other day and so on. Yes, you can do this. But this is easy preaching. It's not practical because you will do it anyhow, if you have to. I would get really pissed off if anyone comments that I should live life in a different way just because I haven't had a salary in two years, or if I have a bad month trading.  So I'll give you that respect. There is no point in my being all condescending.

No, sir.

That is not the way I operate. What you need is another source of income, and you're looking for it. Cutting expenses is temporary and defeating. Sometimes doing so gives you a false sense of security - such as: if I cut this and that, I can survive two years! Yes, but like the joke goes:

Preacher: If you stop drinking, the women, the eating out, sweets, salty and fried things , you'll live to be a hundred!

Patient: But what's the point if I can't do any of them? ("Toh jee ke karunga kya?")

Don't do it unless you absolutely have to. Life a normal life. Travel, eat, drink and buy clothes like earlier. The idea is to get your emergency buffer so that you can be normal while you get your life back in order.

If you were, on the other hand, inflicted with a life threatening disease that would likely make you incapable of doing a job, I would then say cut down expenses as much as possible. But not...okay, you get the picture.

This is so depressing.

I know.

But losing your job is depressing enough. I’m sorry to throw out gyan like this but there is no point getting depressed. We live in a capitalistic society which gave us great money and opportunities on the way up, and we’ll have to live with the crap it hands us (like getting fired just as easily) on the way down.

You don’t have to change your lifestyle, or grow a beard and smoke pot. (It might help, but that’s not the point) If you spend a little time planning your emergency buffer today, it gives you time during your emergency to consider some of the other options as well, without cutting out your gym subscription.

It’s not personal, it’s business. And your reaction to it has to be business-like as well. It might help if you know that it’s not the end of the world – and I hope this post helps.

(L-R Non-food credit, Bank credit to commercial sector. Click for larger images)

The SAAR (Seasonally Adjusted, Annualized Rate) of change is 25% for non-food credit and over 20% for bank credit to the commercial sector (as in, different from the credit to individuals).

This is fairly high and going up, despite interest rate hikes! The 2011 data will be better to see as that gets updated.

This post is written by Deepak Shenoy, at Capital Mind.

From a Bank Credit perspective, it has risen to a yearly high, to 22.1%. Money supply (M3) is at 15%+, so it seems like the interest rate policy is yet to take effect.

Inflation isn’t necessarily bad – the west desperately wants it, for instance – and at this point it may be under control with food prices likely to soften further after a good harvest. At the monthly level, we are still under 9%.

Bond yields are hovering around 8% (the 10 year was around 7.96% on Friday). That might indicate that there isn’t too much fear of RBI softening even more, but it’s come in a week when stock markets fell a lot, so money might obviously flow into bonds.

At this point, as Europe is reeling, it’s not nice to speak about rising inflation. But that’s what’s happening with China too – and there are serious attempts to curb it. We have a world where one part is affected with gangrene and another with cancer, and what solves one will hurt the other. Unless you find appropriate insulation – which in this case can only be serious trade barriers. Like all things macro, everything will happen in slow motion, so it’s probably better to sit back and wait.

This post is written by Deepak Shenoy, at Capital Mind.

(Click to view larger image)

Note that credit growth last year came down substantially from March to September, so the next few months should see strong growth figures even if the absolute numbers come down. And in general we are still strong:

This post is written by Deepak Shenoy, at Capital Mind.

There will be a new data point tomorrow. Strong bank credit growth is good for the economy, but in a time of huge inflation it might not be considered good. Plus, a bulk of that credit growth will be in the BWA and 3G auctions recently (nearly 3% of overall figure) so we’ll have to see it move beyond 20%. A rate hike is expected on July 27th; at this point, high bank credit growth will only ensure that hike happens.

This post is written by Deepak Shenoy, at Capital Mind.

(My earlier reports had some incorrect data for the middle of 2009, apologies)

This isn’t very good because WPI’s overall index – released only once a month now – is hugely dependent on primary articles inflation. The Monthly index (till March):

Plus, remember, fuel prices are up and are likely to go up some more. Credit growth has now crossed 17%, and that’s again reaching territory where it could fuel even higher inflation.

And strangely, in this process, the 10-year bond yield has been going down! Meaning, more people are buying bonds. In the last one week, the 10 year bond has actually increased in value (which brings yields down)

The new benchmark 7.8% 2020 bond was only introduced two weeks ago, so there might be a flight to move from the old 10-year (6.35% 2010) to the new one, thus increasing the price of the new benchmark bond artificially as people buy it after selling the old bond. Still, the last two weeks have been seriously turbulent abroad, as government bonds got battered – seems like it had little impact on us.

And, looking at this it seems the market expects no interest rate hike despite high headline inflation numbers.

This post is written by Deepak Shenoy, at Capital Mind.

Banks were the strongest through the week. SBI and ICICI Bank led the pack, which HDFC Bank underperformed.

Bank lending went to 16.95% with data of April 9 announced this week. Fairly healthy, I would say:

Yet another 12,000 cr. auction went through smoothly – but the yields are going up. The 10 year has inched back to 8.06% from the under 8% levels we saw earlier this week. The 6 year bond is now trading at 7.64% which makes for a fairly steep yield curve.

(Tenor = actually the year of expiry, 10 meaning 2010 etc.) Basically everything above 2015 trades at 7.5% or more – the 2028 bond must have been a freak trade. This graph is borrowed from CCIL and is all wonky – I need to generate one myself.

Btw, Steep yield curves are good for banks; remember they borrow short and lend long, so if short term borrowing is cheap and long term is expensive…you get the picture.

This post is written by Deepak Shenoy, at Capital Mind.

(Click for larger images)

Is this because of the lower base effect in 2009? Not really, since we have grown 35% since 2008.

However you see it – credit growth is perking up. But this is the beginning of the rate hike cycle, whose effect we will only see after six months or so. Watch this space.

This post is written by Deepak Shenoy, at Capital Mind.