inflation, economy, interest rates

mr_rush

Reading today on the BBC that inflation in India is 12.4% compared to 4% last year. Interest rate set by RBI is 9%. Looking at HDFC bank's website, I see most of their savings vehicles don't even match the RBI interest rate. Keeping money in the bank effectively loses you money. The Sensex is all over the place (I invest into India via a UK fund and my holdings have been -20% to +5% over the last 3 months).

Where are middle classes putting money they save?

shashank.aggarwal

Last Six months have seen lot of turmoil. So as of now things are not very clear.

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mousourik

for Indians in India, ULIPs might be a good option. if one goes for long term investment, these short turmoils will eventually have no effect. one gets good returns, tax exemption, life insurance....

Indojingai

Land, houses, property et al.

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obione980

There's cash, property and shares. That's it!

Cash pays OK in certain combinations of circumstances, but rarely in high inflation.

Property is generally reliable, but can flatten out, and indeed fall in value - depending on where it is.

Shares in blue chip enterprises are the most consistent and reliable over the long term.

Nick-H

Inflation is always worst for those living off savings, or with fixed incomes such as pension etc.

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edwardseco

Housing is inflation sensitive and a good hedge against that. My late mother in law had her pension ripped off but made it all back in spades by buying a flat in Hyderabad. But, a big caution, its subject to price corrections. Just note the recent events in England and the states. On my street the first sale of the year happened. This has established a floor but down 25%. Four more properties to go, all foreclosures..

Nick-H

I'm expecting a price correction here. The steep rise has levelled out and the market has gone rather flat.

Somebody told me, "The price of land in India never falls.".

I told them, "You never saw it triple in two years before."

capt_mahajan

Did, actually, in Mumbai in the 80's, just after the Emergency.
Maybe other cities too, but I don't know that.



Not really. High, hidden and varying costs, non transparent- and they invest in the stockmarket and debt too, so you may as well invest directly in mutual funds in the mix of debt and equity you want.

Insurance is seperate from investment, in my view. ULIPs have done well because the stockmarket has done well till some months ago.

They carry the same risk as mutual funds, with higher administration costs.

skk

A contributor in another inflation thread here alerted me to the fact that in India the inflation number that gets reported ( and also flashed round the world ) is the Wholesale Price Index - that's what the 12.4% that the BBC report refers to. Here is the Indian govt. press release:
http://eaindustry.nic.in/press_out.htm

I haven't yet drilled down into the construction of that index but I sense that the Indian WPI corresponds to the US and UK PPI ( Producer Price Index). As an aside, the wikipedia entry on the Indian PPI is dead wrong IMO - after I do the drill down and understand the WPI I'll update the wiki.

The paradigm for a risk free inflation adjusted rate of return usually uses the CPI (Consumer Price Index) in the US and UK. The equivalent value in India, latest numbers are for June, is 7.3%.
http://mospi.nic.in/mospi_cpi.htm

The Indian federal(i.e. goverment debt?) 10 year bond yield is at 8.71%, so, at first sight at least, there is actually a POSITIVE, albeit very small, risk free inflation adjusted rate of return in India - unlike the US ( blech).

Of course savvy UK investors, who know how the CPI has been manipulated, use the RPI as their inflation measure and in the US, I've abandoned the US official measure entirely and use shadowstats' measure.

Applying the same scepticism to the Indian statistics office, that 7.3% CPI value needs to looked at harder before acceptance at face value. One day I'll drill down into the composition of the index. So, being sceptical, with such a small +ve real risk free return, I'd worry that its actually -ve.

But at least its risk free. Once you start taking on risk with your investment/speculations, the returns change - but you ARE taking on risk. Nobody has yet mentioned gold, so I will. In India I'm told that its usually in the form of real gold, in the West, its some sort of derivative instrument - a straightforward one would an gold ETF - NYSE:GLD. Only the gold bugs, and survivalists use physical gold - eg. gold coins - Having said that - I have some

Disclaimer: The usual "this is an exercise of 1st amendment rights, NOT financial advice" statement applies.

-skk

mr_rush

As a continuation... I recently went to a property expo, admittedly in the UK, where Noida 2 bed flats were being marketed at 90 Lakh. I was willing to discount this as NRI premium but my mausi tells me her comfortable but hardly luxurious 3 bed place in Mayur Vihar Ph3 is worth 1 crore. From what I understand, a decent middle class metro salary is 50,000 Rs = 6 Lakh in a year. Even with people earning double salary incomes of 10 lakh/year are they affording places in MV? Its hardly an amazing place to live?

skk

Hey, 1 crore is 100 lakh so the 3-bed is just 11% more than your 2-bed property expo 90 lakh property. So, at first sight, although one needs the sq ft(meters) to be more certain, it doesn't sounds like your maus(h)i is bull-shitting you - or at least its on par with the bs that the property expo organizers are selling you.

The "selling" word is the operative word. I wouldn't buy anything, and neither does Warren Buffet and most other good speculators/investors, that somebody is selling me. I prefer to buy( or short sell) stuff that I work out by myself.

Property valuation is a comparative process, full of bull-shit despite appraiser exams, regulatory bodies and all as people in CA, FL, NV, AZ and of course the UK have so painfully found out.

Paying back and making leveraged loans aka mortgages based on faked underlying asset values ( cf property appraisals), faked income statements, is a painful process for both the creditor and the debtor when the bubble bursts.

The residential property market in India is undoubtedly in a bubble - I can say that without knowing much about that particular market, let alone Noida at all but simply by my knowledge of "Manias, Panics, Crashes" - History of Financial Crisis by Charles Kindleberger and of the rapid increase in prices that's occurred.

If you don't want to shell out for THAT book, try the 1841 book by Charles Mackay - "Extraordinary Popular Delusions and the Madness of Crowds Vol 1" Chapters 1 to 3 available free at the Gutenberg project:
http://www.gutenberg.org/catalog/wor...438&pageno =6

You could also look at how property developer stocks have crashed, 50% off on the BSE to get a feel for where the Indian property bubble is at, at the present time.


-skk

Nick-H

Oh, bubble, yes... I have no doubt about that either, but I think that we are where London was about twenty years ago (when I bought my house ). Prices will drop, far enough to hurt those who just bought (err... yes, I bought last year) but never to anywhere even vaguely near the levels of three years ago.

skk

I refer you to Charles Mackay's "Extraordinary Popular Delusions and the Madness of Crowds"

OK, time for weasel words - I'm talking in inflation adjusted values, not nominal values, of course..


-skk

mr_rush

I do not doubt my mausi (aunt) telling me the truth - her modest 3 bed place in MV3 would sell for 1 crore. The metro extension being build 10min walk away will only add to the value. Its just that for me, the property market in India seems very out of touch with the earning power of middle class Indians as I understand it.