Economic indicators in Banking and PSU Funds

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Various economic indicators provide insights into the health of the overall economy and guide key decisions in these industries. This article examines some important macroeconomic indicators in banking and PSU funds and how they work as mutual fund investments.

  • Table of contents
  1. Macroeconomic Indicators in Banking and PSU Funds
  2. GDP growth rate
  3. Inflation rate
  4. Fiscal deficit and government borrowing
  5. Current account deficit
  6. Foreign capital inflows
  7. Interest rates
  8. FAQ

Macroeconomic Indicators in Banking and PSU Funds

Some of the major macroeconomic indicators that impact banking and PSU funds include the below.

GDP growth rate:

The GDP growth rate is one of the most important indicators of overall economic activity and expansion. A healthy GDP growth rate means rising incomes, more investments and higher consumption levels in the economy. For the banking sector, it translates to better loan offtake as more people and businesses borrow to fuel their spending and investment plans.

Inflation rate:

Rising inflation eats into consumer purchasing power and damages business sentiments. High inflation also forces the central bank to tighten monetary policy which pushes up interest rates. For banks, high inflation means higher loan default rates as borrowers' repayment capacities are hurt. It also constricts net interest margins for banks.

Fiscal deficit and government borrowing:

A high fiscal deficit means the government is borrowing more from the market to bridge the revenue-expenditure gap. This flooding of debt pushes up bond yields and interest rates over time. It also crowds out private sector borrowers to some extent from the debt market. As major investors in government bonds, a surge in public debt issuances impacts the returns for PSU debt funds.

Current account deficit (CAD):

A very high current account deficit poses risks of excess reliance on foreign capital inflows and currency volatility. It also limits the RBI's room for maneuvering on monetary policy due to pressure on forex reserves. A high CAD forces the central bank to defend the currency through higher interest rates. This has adverse consequences for both banks and funds - higher cost of funds, lower lending margins, and reduced returns from fixed income portfolios.

Foreign capital inflows:

Strong foreign direct investment (FDI) and stable portfolio capital inflows broaden the sources of financing for India's current account deficits. They also ease pressure on reserves while supporting the rupee. In turn, steady forex inflows tend to steadily appreciate the currency and reduce external vulnerabilities. For banks and funds, surplus liquidity from such inflows typically lowers domestic interest rates and improves the terms of borrowing from overseas financiers.

Interest rates:

The policy interest rate or repo rate forms the base for banks' lending and deposit rates. A high interest rate regime compresses net interest margins for lenders, limiting their profit growth. It also reduces borrowers' risk appetite which hampers loan growth. Conversely, gradual rate cuts transmitted through lower deposit/lending rates tend to stimulate credit offtake and economic activity over time.

Conclusion

Macroeconomic headwinds like weaker growth, high inflation, financial instability, or heavy stress in the corporate or banking sector can significantly undermine the risk-return profile of banking and PSU funds in the short to medium term. Similarly, upswings in key metrics like GDP, industrial production, jobs, consumption, and global liquidity conditions generate tailwinds for their financial performance. Investors looking to benefit from improvements in these macroeconomic indicators could consider the Bajaj Finserv Banking and PSU Fund. For a detailed scheme information, click here.

FAQs:

What economic indicators reflect the industrial performance in India?
Key indicators that reflect the performance of industries in India include the Index of Industrial Production (IIP), manufacturing PMI and capacity utilisation rate. The IIP and manufacturing PMI provide monthly data on growth across various sectors, while capacity utilisation shows the extent to which installed facilities are being used in production.

How do employment levels impact the banking and PSU fund sectors?
Rising employment rates and faster job creation indicate expanding economic opportunities. This puts more disposable income in the hands of individuals and boosts demand for consumer and retail loans like housing, vehicle, and credit cards. It also means that borrowers will have a higher debt servicing ability which reduces risks for banks.

What is the relationship between fiscal policy and bond market returns?
A high fiscal deficit results in the government borrowing more from the domestic bond market to fund expenditures. This heavy supply of government bonds increases their yields drastically to attract investors. As major holders of government securities, PSU debt mutual funds see the value of their existing bond holdings decline when yields rise sharply. Fiscal prudence with lower deficits is preferable for maintaining stability in bond prices and earning higher returns over the long term.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.