Is there an Investment Boom Ahead?

Modi was taking oath for PM….. Stocks market jumped all time high as if they were fitted with strap on boosters by Modi….. Investors became optimistic about the changing situations and conditions in the country. What was this change due to? Was it due to change in the government at center or all this was Magic of Modi?

Well time will only justify it. But the budget has clearly shown the government’s ambition and plan for the year ahead. The fiscal deficit targeting, focus on reviving investment climate, the changing tax regime, the stands on FDI shows it all.

In this budget, government took the first step to revive the investment climate and to break the Policy Paralysis. Arun Jaitley requested RBI to free the funds for Investment from all the mandatory provisions of CRR, SLR and PSL.

Well what all are these…….

Every bank accepting deposits and recognized by RBI need to follow certain mandatory requirements:

•      CRR (Cash Reserve Ratio): This is the percentage of all deposits that banks need to keep with RBI. At present it is around 4%.
•      SLR (Statutory Liquidity Ratio): This is the percentage of all deposits that banks need to keep with them self. At present it is around 23%.
•      PSL (Priority Sector L
  ending): Under it banks need to compulsorily lend at least 45% of the total lending to priority sectors like agriculture.

All these are required for safeguarding the banking system.

But if you add all these you will observe that around 72% (4+23+45) of the funds of the banks are blocked and hence if banks have Rs 100 with them, then they are only able to lend Rs 28.

But now RBI has issued a notification regarding it.

If a bank is raising funds to lend for Infrastructural development and Housing then on these funds it need not follow the above mandatory provisions.

It will release the blocked money of the banks and hence more liquidity will be available in the infrastructure market which was very tight. It will improve the financial situation of the investors in the country who were unable to take on new projects due to lack of money.

But it might increase inflation?

No this is a wrong assumption that inflation will rise in the economy due to more money in the market.

Inflation rises when there is more demand in the market and the supply is restricted. But if with the increase in demand if you increase the supply as well then it will not affect the inflation much.

This move will increase the supply of Housing in the market thus reducing the prices of houses in the short run as it will take time to increase the income in the economy.

So planning to buy any property, an apartment or a house for your family then it will be the best time. Don’t ask for the right time to buy as economics just predict the future unfolding of situation and not the time it will take to unfold. It all depends how fast the market responds.