With India having been in a nation-wide lockdown for over 60 days - most economic activity had come to a standstill. From small businesses and local shops to large malls, from entertainment to the hospitality industry to travel and tourism, practically all industries have been locked down.
While the country prepares for reopening of economic activities, it is pegged that a major dent has already been cast into India’s growth for the upcoming year (FY 21). Former RBI Governor, estimates that the growth rate for FY 21 can even be negative, significantly lower than a 5.2% growth rate in the previous year1. In fact, rating agencies such as Fitch and Crisil have predicted a severe negative growth rate of up to 5%1.
While these statistics look grim for the country as a whole, how do they impact your personal finances?
First point of impact - primary
Most of us have probably already faced loss of income – either by way of pay cuts or loss of business and in severe cases even job losses and business closure. This overall reduction in pay scales and growing unemployment further reduces demand for goods and services, which can further reduce growth creating a spiralling and widespread impact on loss of income across industries.
Apart from the primary impact of immediate loss of income, negative or nil growth can have a much more far-reaching impact on your finances:
Spiralling impact - secondary
- Interest rate reductions
Low growth rates prompt interest rate reductions by the government to encourage borrowings to boost demand for goods and services so as to accelerate economic growth.
Lower interest rates can negatively impact income from your debt-based instruments. Lower interest rates mean lower bank deposit interest rates and lower coupon rates – this can create a dent in the income of those relying on fixed interest-bearing investments.
On the flip side, you can probably avail cheaper loans – be it personal, housing, vehicle etc. You can benefit from interest rate reductions on both new and existing loans, by way of reduced EMIs.
- Impact on real estate
Dwindling demand for high value assets such as real estate assets, may create a dip in real estate prices. As a property owner you may, as a result, bear the brunt of fall in your rental income as well as loss in the value of your assets.
On the other hand, this could be a good time to capitalise on a falling real estate clubbed with lower loan rates, by investing in property.
- Impact on your investments
We tend to rely on additional income such as bonuses and windfall business gains to supplement our regular savings and boost our investments. A low growth economy is unlikely to give rise to such additional income veering you off track from your original financial plan.
In fact, many of us may have dipped into our contingencies funds to compensate for the loss of income, resulting in us diverting money from our investments into rebuilding our contingency fund.
On the flip side, the lockdown has restrained us thereby curbing all discretionary spending. The savings during this period can be used to pad up existing investments. Further, equity mutual funds may aim to provide an investment opportunity for long term investors since markets have fallen over the last few months.
While we brace ourselves for tough times in the year to come, a prudent investor can actually spot the silver lining to this dark cloud and capitalise on the highlighted positives. While these repercussions seem daunting, a bounce back can be expected in the longer run. So, try and hold on to your investments and stick to a disciplined investing plan to emerge financially stronger on the other side of this pandemic.
Sources:
1. https://economictimes.indiatimes.com/news/economy/policy/government-measures-to-deal-with-coronavirus-impact-very-positive-former-rbi-governor-bimal-jalan/articleshow/76073379.cms
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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