Why Dollar based investing matters

Wednesday, January 15th, 2020

It is natural for Indian investors to think about investing in rupee terms. Our money is invested in Indian assets and we also spend our money in India in Rupees and therefore the default is to take the Rupee based returns of our investments.

This contrasts with global investors who tend to think of their returns in the global reserve currency which is the dollar. Should this matter to us?

I would argue that it does because, without realising it, we are spending more and more of our money in dollar terms. Indians spend a lot more today on foreign trips or to send their children for further studies abroad than ever before. Even for those that can’t afford this, the electronics we buy are all imported. That latest iPhone or Google Pixel is first priced in dollar terms before being converted into rupees.

The Rupee has had a tendency to depreciate over longer periods of time given the inflation differentials and macroeconomics of our country relative to the rest of the world. This means that a number of our purchases that are priced in dollars will continue to get more and more expensive.

It is therefore critical for us to look at our returns using a dollar base. If, for example, an investment we have made goes up by 5 per cent in rupee terms but the currency has depreciated by the same amount then we are back to square one.

The Dollex is the dollar based return of the Sensex. We can see from the chart below that, over the last decade, the Sensex has returned roughly 9 per cent annually in Rupee terms. But the dollar based return of that is roughly 5 per cent.

One of the first things that investors are told when they first start thinking about the stock markets is to buy what they know and understand.

Lets take a hypothetical consumer: She will have a Xiaomi Android Phone, drive a Hyundai car, watch Amazon Prime on her Samsung TV, use an LG Washing Machine, do work on a Dell laptop and maybe have a Cadbury chocolate in her break time. None of these companies are listed on the Indian stock markets. If we are increasingly consuming brands that are global, why should we restrict our investments to the local markets?

Such a strategy would diversify away the risk from investing in one country while increasing exposure to the growth drivers of global companies. How would such a strategy have played out over the last decade?

If we see the chart above; the S&P500, in red, which tracks the US markets has had the best performance by far in the last 10 years with an annual return of roughly 11 per cent. This is not to say that this performance will be repeated in the next decade but it disproves the commonly perceived notion that Indian equities are the highest returning assets globally given our high growth rates. While the Dollex, in blue, has done much better that the MSCI Emerging market index, in green, we are still underperforming a broader basket of global equities, the MSCI World in purple, which has given an annual return of 8 per cent. We use data for these charts from Investing.com

It is therefore critical for investors to start thinking about their investments in dollar terms and also for them to look at international investing to diversify their risk and possibly hedge their returns in dollar terms.

How would one go about it? Asset allocation would be a prudent strategy: having a mix of exposure both to Indian assets and International assets makes the most sense. More risk averse investors can look at Gold instead of International equities to hedge the currency risk. There are a number of mutual funds available to Indian investors that invest in dollar-based funds. I would suggest that you first speak to a qualified investment advisor to determine if such a strategy is appropriate for you before investing your funds.

Disclaimer: Please note that all the information mentioned above is for educational and informational purposes only. Please consult a qualified financial advisor prior to making any investment decisions.

The basics of Personal Finance

Wednesday, December 25th, 2019

This was a talk I gave on personal finance and on a framework to think about financial freedom. It was followed up by some case studies and was meant to act as a primer on money management.

The presentation was given to a group of young students and graduates who were just starting out their careers. The topics of discussion were:
1) Investment 0: the steps to take before you start investing
2) Why financial goals matter
3) The importance of asset allocation
4) A framework to think about your personal economy

You can also watch the video here: YouTube.

Disclaimer: Please note that all the information mentioned above is for educational and informational purposes only. Please consult a qualified financial advisor prior to making any investment decisions.

Is Instagram emptying your wallet?

Wednesday, December 25th, 2019

I have started writing about personal finance at the daily publication Broadsheet. This second piece, reposted here with their permission, discusses how Instagram affects your financial health:

Credit card business in India is booming thanks to Generation Z and Millennial shoppers. People under 25 accounted for less than 2% of credit card transactions back in 2016. That number has shot up 5x to 10% now. Indians under the age of 30 account for a whopping 35% of plastic users in India—compared to 27% for those over 40. And the inevitable consequence of that bingeing is ballooning credit card debt. The reason: Our constant need to buy, buy, buy everything—be it a product or an experience—we see on our social media feeds. 

Here’s a guide on how to say no to debt, improve your credit rating, and resist the wasteful allure of Instagram.

First, check your CIBIL score: That’s the three-digit numeric summary of your credit history issued by the Credit Information Bureau of India Limited. It helps a potential lender—for e.g. banks—determine your credit-worthiness based on your financial history. So the first step is to diagnose the state of your financial health over at the CIBIL website—which gives you one free report a year. 

A score between 750-900 means you are in decent shape. The higher your score, the more likely you are to qualify for a loan. There are also added benefits such as lower interest rates and better credit card benefits. OTOH, a low score can make life very difficult, especially when you start adulting and need to make big-ticket purchases for a car or a home. 

Next, make a plan to up that score: If you don’t have a good score, it will take a couple of years to improve it. So you better start doing the following:

  • Pay your credit card bills before their due date. Sooner the better. Also: make sure you pay the full amount, and not just the minimum payment. 
  • Learn to love your debit card—which deducts the amount directly from your bank account, and minimises the risk of excess debt.
  • Use a digital wallet to shop because it allows you to set daily as well as monthly limits. For example, my Paytm account has a daily limit of Rs 5,000, and a monthly limit of Rs 20,000. 
  • Don’t continually apply for new credit cards because that can damage your score—especially if you are rejected. 
  • Do not stretch your credit limit on any given card to the max. Never spend more than 50% of your available credit unless you are sitting pretty with a CIBIL score of 750-plus. 

Say no to Insta gratification: which is easier said than done. So here is a list of totally doable tips: 

  • Move the money out: Set up an auto-payment that will re-route a big chunk of your salary to an investment or another bank account with a higher interest rate. Make sure it is triggered soon after your salary hits the account, i.e. very early in the month. Next, pay off all your monthly bills. Again, many of these can be automated, and make sure they are paid within three days of your salary date. This will leave only a small surplus for you to potentially splurge.
  • Delay gratification: You just saw the latest pair of Needledust ballet slippers that you totally must have for the wedding season. Dump it in the shopping cart, but do not hit ‘buy’! Give yourself 72 hours to decide if you really, really want them. Chances are the slippers will stay exactly where they are—in the cart. 
  • Time your expenses: set aside assigned shopping days and time them for the end of the month—exactly when you are feeling the most broke. Also: Shop when you are feeling good, not when you are having a bad day. Stress shopping is as bad for your health as stress eating. 
  • Delete those shopping apps: Uninstall Shein, Amazon, Flipkart, Snapdeal etc. from your phone. Switch off the shopping feature on smart speakers like Alexa, Google and Siri. It reduces impulse buying—especially when you are bored. Also useful: an occasional social media cleanse. Deleting Insta and Facebook for a few days is great for both your mental and financial wellbeing. 
  • Budget for the unexpected: Yes, we all know we need to make a budget and stick to it. But we usually only list known and regular expenses, and treat everything else as pocket money. One of the biggest triggers for debt are unexpected or unusual expenses like medical bills, family crisis or wedding-related travel. So always put aside Rs 10,000 for out-of-ordinary spends so you never cross the red line.
  • Ask yourself why: Make a list of the big-ticket dreams in your bucket list. For example: that holiday in Spain, a new car etc. And each time you are tempted to splurge on a new dress or expensive meal or weekend in Goa, take a hard look at that list. A passing pleasure can often cost you your life goals. 

FOMO is a natural human instinct. We are wired to want to fit in with the tribe, and worry about being left out. And that’s why we compare our lives with those of others on Facebook or Insta. But don’t let photos of fancy holidays, clothes and meals eat into your hard-earned money and undermine life ambitions that really matter. 

Disclaimer: Please note that all the information mentioned above is for informational purposes only. Please consult a qualified financial advisor prior to making any investment and financial decisions.

Kaise Banoge Crorepati

Friday, December 6th, 2019

As part of the UTI Swatantrata Investor education initiative, I was interviewed for a livestream on the theme of Kaise Banoge Crorepati:

You can also watch it here: YouTube, Twitter or Facebook

State of the Economy

Wednesday, November 27th, 2019

The economy has been going through a slump in the last few quarters. And while the day-to-day news can be quite negative, there have been some major structural changes in India over the last few years. In this post I seek to make sense of all of it by looking at it through the eyes of 3 economists and a start-up investor. 

This is a long post and there are a few questions that I would like to address:

  • What is causing the slowdown in consumer demand?
  •  Is the economic slowdown cyclical or structural?
  • Even though inflation is low, why are interest rates still so high?
  • When smaller retailers talk say “paisa bazaar mein nahin hain” (there is no money in the market), what does that really mean?

The Slowdown in Demand

One of the main topics that we see have seen the business news channels cover in the last few weeks has been the slowdown in consumer demand. This has come as a shock to a number of financial market participants, particularly because India’s consumption was expected to remain a strong growth driver in light of structural tailwinds tied to the demographic dividend.

To understand what is happening, we need to first categorise the Indian consumer correctly. Our country is incredibly diverse with people consuming things in different ways. For a long time the default categorisation was made between urban and rural demand. To understand the roots of the current slowdown, I believe we need to split the basket in a different way. Specifically, a framework laid out by the start up investor Sajit Pai, which divides the Indian consumer into India1, India2 and India3.

The Indian consumer market is actually much smaller than commonly perceived. The bulk of the market is catering to about 23 million households or about 110 million people. This is India1, a demographic with a per capita income of about $8800, similar to that of Mexico. The next 100 million Indian consumers form India2, which is the aspirational consumer market. In this bracket, the per capita income averages about $3000 and akin to the economy of the Philippines. Finally, India3 consists of the remaining 1126 million people who subsist at $1300 per capita income, comparable to Sub Saharan Africa.

This brings us to the first economist, Rathin Roy, and his views on the slowing home market demand. He postulates that the Indian economy till now has grown largely to meet the demands of the top 10-15% of consumers, the India1 segment. The fact is that the leading indicators of consumption in our economy reflect the demands of India1: Autos, FMCG, consumer durables, air travel, finance and so on. The people of India1 already have good access to all these products and therefore demand in this segment is plateauing. In fact, it is increasingly being taken up by imports i.e. foreign trips, studying abroad and imported consumption products like electronics.

This framework is unlikely to sustain in the medium term and needs to reflect goods and services that the average Indian consumes. These should be things like basic food and clothing, affordable housing, education, health and maybe a two-wheeler or a cycle. Companies till now have been mainly focused on India1, but to stay relevant they will increasingly need to find ways to cater to India2. Of course, there is the element of consumers moving up the income bracket and increasingly consuming products like India1, but that process will be slow and is not something we can count on in the short term.

Before we move on, there is one more aspect to consumer demand that should be addressed which is the Pay Commission. The second economist who we refer to, Neelkanth Mishra, discusses this in the video below. The pay commission’s affect on consumption, the fiscal deficit and economic momentum is underappreciated. Its impact on our economy is roughly to the tune of 2-2.5% of GDP and is a pure consumption stimulus. This boost happens once in 10 years and leads to a permanent shift in salaries and pensions of government employees. We are nearing the end of the current cycle and are therefore experiencing a tapering of the growth in consumer demand that the last pay commission provided.

Is the economic slowdown structural or cyclical?

I would encourage you to watch the following video by Neelkanth Mishra at the CFA society where he elucidates his views on the current slowdown:

To summarize, he believes that the current slowdown is cyclical in nature. Moreover, it reflects structural changes in our economy which have been led to large productivity gains.

In the year 2000, half of India was connected by road, today that figure is over 95 per cent. The impact of all-weather roads on the economies of local villages is dramatic. It means that goods and produce from the village can easily be sold to the outside world. It means that people can more easily migrate out to bigger cities for jobs. And it means that goods and services from the outside world can now be provided in the village more easily. 

Building of roads has also enabled a substantial improvement in electricity connections. Electricity enables the setup of supply chain infrastructure like milk chilling facilities in the village which lead to efficiency gains. In China, 90% of rural households have a washing machine and a fridge. As more houses in rural India are provided with an electric connection, we will likely move in the same direction. This frees up time for the women in the household and dramatically improves productivity. The provision of toilets and a direct water connection is likely to have similar effects.

Penetration of mobile phones is improving quickly and has now reached 55%. The advent of cell phones has meant that information transmits very quickly. Neelkanth gives a great example contrasting prices for fish before and after the advent of cell phone connections.

Earlier, a fisherman would go to the nearest market to sell his produce without knowing the price for his goods. This led to a situation of oversupply or undersupply in different micro markets and therefore a large volatility in prices. The fisherman was a price taker in that if the price was too low in any given market, he could do nothing because his produce would get spoilt by the time he went to the next place. With a cell phone connection, the fisherman now instantly knows the market where he will get the best price and can therefore realize a better income and have less waste. From a macro perspective, it also leads to a fall in volatility of prices because demand and supply are better matched.

Similarly, within the last 3 years, the number of people connected to the internet has increased from 37% to 96%. The network effect of this has led to tremendous efficiency gains in terms of employment, inventory management and creation of marketplaces. The rise of the gig economy and the ability of social media to disseminate information means that part time workers can find jobs much more quickly and therefore be far more productive.

The outcome of all these productivity gains has led to a surplus particularly in terms of food output. As a result, inflation has shifted structurally lower. The problem we have now is that the cost of capital has not fallen in line with inflation and this is what is having a dampening effect on growth. To understand what is preventing interest rates from falling, we need to first understand the twin balance sheet problem.

The Twin Balance Sheet Problem

Which brings us to the third economist and former CEA, Arvind Subramanian. In the video below, he describes the root of the problem and compares it to similar situations from around the globe:

The problem started in the 2000s when private capex increased massively. There was a big push for building infrastructure which led to a rapid increase in credit growth. Most of the projects were public private partnerships and therefore were financed by the public sector banks (PSBs). Over the years, leverage ratios of private companies went up because the financing of projects was mainly through debt and not through equity – promoters did not have as much skin in the game which encouraged reckless behaviour. There was also an element of crony capitalism.

This all came home to roost a few years later. Projected returns were not realised or approvals were not put in place leading to delays in execution and cancelled projects. The resulting funding crunch led to stress on the balance sheets of the corporates. The PSBs also fell under stress due to these loans turning into bad assets. 

Unfortunately, the problem was not fixed quickly and it festered. Corporates borrowed in dollars and the rupee depreciation made things worse. Evergreening, extension and restructuring of loans by PSBs also exacerbated the problem. PSBs enjoy a lot of trust from depositors because they are owned by the government and this probably led to complacency and prevented sharp adjustments to outstanding loans. 

When the problem was finally recognised, the PSBs needed to keep aside capital to provide for bad loans that had been given and this meant the banks had to curtail fresh lending across all segments. This has impeded the transmission of rate cuts. Similarly, private capex has fallen because of lack of availability of credit and because of deleveraging of private sector balance sheets. This is in essence the twin balance sheet problem: both the banks and corporates are stressed and it is creating a drag on growth. 

Why the cost of capital needs to come down

We have written earlier about how India’s financial institutions can be classified into five buckets that do lending. Those are large PSBs, smaller PSBs, private sector corporate lenders, private sector retail lenders and the NBFC segment. One by one each of these legs has started to fall. The PSU banks are grappling with NPA issues, the private sector corporate lenders are facing promoter and management issues, and, after the IL&FS and DHFL episode, the NBFC segment is hampered. 

This means that the banking system capacity is severely constrained. The only segment that can be looked at for growth are the private sector retail banks. Banking is an industry whose profitability is determined by how much they can control the risk of their lending book. Therefore these banks at most can grow at two times the nominal GDP growth. This has played out in the numbers: annual credit growth in banking overall has been roughly 7 per cent since 2014. However, PSBs have grown at 3 per cent whilst private sector banks have grown at 18 per cent.

M3 is the money that the distributor and retailers talk about when they say there is “no money in the market”. M3 has been lagging nominal GDP growth for over 2 years. What this means is that money is in short supply in the economy.

A lot of money is being deposited in the banks, majorly the PSBs, who have no capacity to lend. And even when they do lend, the interest rates they give are too high relative to inflation. This limits liquidity and has caused destocking across the entire supply chain. In the video by Neelkanth Mishra above, he talks about how this has a bullwhip effect: small changes at the retailer end of the supply chain aggregate to large changes in demand at the manufacturers end.  

Clearly to restore credit growth, the cost of capital has to fall. 

Putting it all together

India does face a number of headwinds: the cost of capital is too high, consumer demand is plateauing, we are in the middle of a credit crisis that will take time to clean up, the global environment is not conducive to higher exports and so on.

However, there have been a structural change in the underlying nature of our economy:

  • Increasing penetration of roads, electricity, cell phones and internet has led to massive increases in productivity. Similar gains could be expected from bank accounts, toilets, piped water connections and universal health insurance.
  • Inflation has now moved structurally lower. There is also now a monetary policy framework to keep inflation low and within a band over the medium term. It is a matter of time that interest rates will move lower to reflect this
  • The GST, even with all its flaws, has economically unified the country under one indirect tax code which will enable companies to take advantage of economies of scale
  • The bankruptcy code puts more power in the hands of bankers and mean that promoters will have consequences for their actions. This will boost corporate governance in India a great deal and hopefully prevent excess leverage of the past from repeating again in such a systemic way. Similarly, the recent NBFC crisis will ensure that there is much more market-based discipline in lending to corporates in the future
  • RERA means that there is now more transparency in the real estate sector and it will ensure that only the best companies will survive and grow. It will also make it much harder to use real estate as a vehicle for black money in the future.
  • The recent corporate tax cuts mean that India now is globally competitive in rates. And finally,
  • The recent announcements on disinvestments shows that the government is committed to fiscal consolidation and to privatisation.

A number of these changes have resulted in short term disruptions, but when you add them all up, it gives you great confidence that the medium to long term growth path is likely to be much stronger and far more sustainable.

The first steps toward financial health

Tuesday, October 22nd, 2019

I have started writing about personal finance at the daily publication Broadsheet. This first piece, reposted here with their permission, is on taking the first steps toward financial health:

It’s easy to feel overwhelmed when we start to think about getting our finances in order. We are pressured by overeager relationship managers at the bank, offered all sorts of gyaan from relatives and friends. However, here’s the upside: it gets us thinking about investing in the markets and putting aside money for the future. But before you act on any of that advice, here are five things you need to do first. 

One, follow your money: It’s payday and you finally have some cash in the bank! Cut to 15 days later and you really have no clue where all that money has gone. Financial health begins with knowing and controlling how you spend your money. It may sound tedious, but it’s actually not that hard. Here are a few ways to do it: 

  • Get an app like Walnut or ET Money to track your cash flows.
  • Or do it old school: create a simple table in a journal or use an excel template to categorize your spending. Prioritize what is essential and try to reduce your spending on the rest.

The bottomline is that you have to find a way to save in a consistent manner—month after month. And you can’t do that if you don’t know how much you are spending and on what. And unless you are already earning more than you can spend, there will be sacrifices—major or minor.

Two, clear your credit card bills: Did you know that paying down credit card debt is in itself a form of investing? A low interest credit card starts at an interest rate of 18% per year—and that debt compounds to a much larger amount over time! So if you are carrying Rs. 10,000 on your card and don’t pay it off for 5 years, you owe Rs 22,877 to the credit card company—that’s far higher than any return you would reasonably get if you had invested the same amount in equities or mutual funds. Simply not owing that amount is an investment in your financial future.

Three, create an emergency fund: Here’s the hard truth. You need to keep roughly 6 months of living expenses in a fixed deposit. This is a must-have buffer to survive any family emergency, health crisis or the loss of your job. Even if you think you are protected from any such misfortune, think of it as learning a useful lifelong habit—i.e to save. This is especially important if you don’t have any savings as yet. Just building that fund will force you to put aside as much money as you can. No, please do not dip into that honey pot to fund that trip to Sri Lanka. 

Four, get adequate insurance: The first rule of making money is to not lose money. Insurance is a must to protect you from unplanned financial shocks. Here are a few essentials to keep in mind:

  • We tend to put health insurance at the bottom of our expense list—especially when we are young or between jobs. But that is a serious mistake. Unplanned medical emergencies are the leading cause of financial catastrophe around the world. Major surgeries cost lakhs of rupees—and with a more serious condition, the bills can quickly pile up. Therefore, if you are in your twenties, take a cover of at least Rs 15 lakhs. If you are in your thirties (with a kid, maybe), ramp up to a minimum cover of Rs 20 lakhs per member of your family. 
  • Opt for a term insurance—which is essentially a life insurance that offers cover for a limited time—and only pays if a death occurs within that period. The benefit of such plans is that they are substantially cheaperthan other policies. If you have anyone who is financially dependent on you (kids, parents, spouse), then you must invest in enough coverage so they can cover their basic expenses for at least a decade—in case you are not around to provide for them. 
  • Finally, it’s best to not mix insurance with investment. I am talking here about ULIPs and endowment plans—both carry exorbitant charges and give you neither enough return on your investment nor sufficient coverage on your insurance. You can learn more about why they are a bad idea hereand here.

Five, plan wisely for taxes: I recommend my clients think of taxes as a separate bucket from investing. Sure, there are many avenues for an investor to save taxes but here’s the bigger picture: tax-free deductions are typically limited to Rs 1.5 lakhs a year. So if you already have insurance and a provident fund, you may gain no further benefit by investing in more tax-saving equity schemes. 

So what’s next? Once you’ve set yourself on the path to financial planning, it is best to speak to a trusted advisor. Ask friends and family for recommendations. A good advisor will create a comprehensive plan for your investments that considers your time horizon, your ability to withstand losses and ensure that your portfolio is diversified across multiple asset classes. 

Final bit of advice: There is no better teacher in investing than experience. Start small, maybe with a systematic investment plan (SIP) in a mutual fund, and build over a few years. There are plenty of options available, but it’s best to stick to simple, low-cost mutual funds that have performed consistently over long periods of time. You can look at the ratings of the funds in the Mint 50 or Morningstar’s Analyst Ratings as a starting point to help narrow down your choices. How do you pick the right fund for your needs? Well, that’s a pretty big topic which I will tackle on another day.

Disclaimer: Please note that all the information mentioned above is for educational and informational purposes only. Please consult a qualified financial advisor prior to making any investment decisions.

Deconstructing the Rural economy

Monday, March 25th, 2019

Fascinating discussion on underlying drivers behind rural economy distress and what can be done to address it.

Some interesting points raised:

  • Are MSPs effective and actually getting to the end beneficiaries? Is this a band-aid that, without structural changes to agriculture, will create further problems down the line
  • Are loan waivers a permanent subsidy because voters do not want withdrawal of benefits?
  • Earlier the policy was do ban informal lending. It would be worth re-looking at this and try and bring informal lenders into the fold. A number of such lenders have been in operation for decades and know their customers well
  • Currently insurance schemes are very inefficient and do not have much impact. Digital solutions can be adopted to improve delivery and ensure more people can benefit
  • Health insurance is only one piece of the puzzle. We still do not have adequate supply of healthcare facilities and services
  • There has been rampant and rapid transition to financial services. But do investors understand the underlying risk they are taking for these investments?

Linkfest – 102

Wednesday, March 20th, 2019

Some articles from across the web in the last few weeks:

India leads the pack in active management – Ritholtz

The Aldi disruption – The Guardian

The Nifty 50 no longer reflects the Indian economy – Saurabh Mukherjea

Is philanthropy growing in India? – Bloomberg Quint

The future of diamonds is synthetic – Youtube

Management lessons from India unInc

Tuesday, March 12th, 2019

Nice video by Raghu Raman talking about how Indian SMEs function. There are so many lessons we can learn from India unInc which most corporates discount as being unorganised and therefore not worth examining.

Monthly Market Summary: February 2019

Friday, March 8th, 2019

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

We use data for these charts from Investing.com

Global Equities

Developed markets continued to rally in February. Emerging markets, including India fell by about one per cent in the month. Long term returns have been healthy in the US and in India.

Fixed Income

Indian bond yields remained range bound around 7.5 in the month.


Gold moved higher initially, but moved back toward 1300 dollars per barrel toward the end of the month. If the commodity moves strongly away from 1200-1400 dollars per barrel, it would give a better indication of the long term trend.


Oil continued to rally, closing near the 66 dollars per barrel mark. This is still much lower than the value of 86 seen in October of last year which is a positive development for the Indian economy because of our large dependance on oil imports. It is important to keep an eye on this figure as it can have a destabilising effect on our macros.

Indian Rupee

The Rupee was range bound during the month with a slight depreciation against the Japanese Yen.