InvestorQ : Are there some really quick and smart rules that I can follow to evaluate the credit policy announced by the RBI from time to time?
Nisha Chandani made post

Are there some really quick and smart rules that I can follow to evaluate the credit policy announced by the RBI from time to time?

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Bhavika Nehru answered.
2 years ago
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While it is hard to call for a mini advisory series, there are some basic points that you can remember and will help in the process of evaluating the impact of the policy from time to time.

Credit policy hinting at lower inflation is likely to be positive for household budgets. Lower inflation means that there is more leeway in the household budgets and households are able to afford a higher standard of living. That indirectly translates into higher spending in the economy and also higher savings potential, both of which are favourable to the financial markets.

Lower interest rate hints are likely to positively benefit equities and equity mutual funds. There is an interesting reason behind this. When rates are reduced or yields fall, the future cash flows are discounted at a lower rate. Since future value of the stock is based on present value of the cash flows, you benefit when the discount rate goes down as cash flows look larger.

Lower interest rate hints are also likely to result in NAV appreciation in debt mutual funds. This is more so in case of long dated debt or in case of mutual funds with a longer maturity. Lower rates means that longer dated bonds will see greater capital appreciation and that will result in capital gains on the bond holdings. This will enhance the NAVs of debt mutual funds.

Read the credit policy hints on liquidity. Comfortable liquidity is positive for short term liquid funds. Normally, interest rates impacts longer term bonds but shorter term bonds are impacted more by liquidity. This is more favourable for short term and liquid funds as higher liquidity will bring down short term rates and enhance value of such holdings.

Credit policy basically impacts each one of us by the hints it provides on the subject of inflation, interest rates and liquidity. Each of them impacts your household budgets and your investment portfolio in a unique way. Understanding these implications will go a long way in helping you make smarter investment and spending decisions.

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