How does the depreciating rupee affect one’s personal savings and finances? A new book explains it

This article was first published in the Scroll. 

https://scroll.in/article/1093589/how-does-the-depreciating-rupee-affect-ones-personal-savings-and-finances-a-new-book-explains-it

An excerpt from ‘The Economy Is Personal: How Big Economic Forces Shape Your Money – And What You Can Do About It’

Have you ever heard someone say, “The rupee is falling against the dollar”? It might sound like financial jargon, but it actually has a very real impact on your day-to-day expenses – even if you’re not travelling abroad. Let’s break it down.

Every country has its own currency. When countries trade with each other, they need to convert their currency into the other’s. So, for example, if India wants to buy something from the US – like crude oil, electronics or machinery – it has to pay in US dollars, not rupees.

Today, 1 US dollar = Rs 75. But next month, 1 US dollar = Rs 80.

This means the rupee has weakened, depreciated or lost value compared to the dollar. Earlier, India needed Rs 75 to buy something worth $1. Now, it needs more rupees, that is, Rs 80, to buy the same thing. That extra Rs 5 has to come from somewhere – and that “somewhere” is your wallet.

So, when the rupee weakens, imports become more expensive, because we need more rupees to buy the same goods from abroad. And since India imports many essential items, like fuel, cooking oil, smartphones, and electronics, those prices go up for everyone. This increase in prices contributes to overall inflation.

Think of it like shopping at a store where the price tag is in dollars. If your rupees are worth less each week, you’ll have to spend more to buy the same things.

That’s why economists and policymakers closely watch the exchange rate. A weak rupee can make imported goods expensive, and that, in turn, can raise prices across the economy – even for things made in India, because transport and input costs can go up.

Why does a falling rupee make your grocery bill heavier?

Because when imported goods and transport get pricier, those costs ripple through the entire supply chain. When the rupee drops, even your shampoo bottle, bus ticket or smartphone can feel the pinch.

So … What does the exchange rate have to do with the price of milk? If fuel prices rise due to a weaker rupee, transport costs go up and, suddenly, your morning milk costs Rs 2 more.

Inflation refers to the rate at which the prices of goods and services rise over time. In India, this is most commonly measured using the consumer price index (CPI). It is a statistical measure that captures the average change in prices of a fixed basket of items, such as food, fuel, clothing, housing and healthcare, that households typically consume. The base year, currently 2012, is assigned a CPI value of 100. All subsequent values show how much prices have risen since that year.

CPI in 2024: 190. CPI in 2025: 194

This means that prices in 2025 were 94% higher than in 2012. But to find inflation for one year, we look at the rate of change between the two years.

So, inflation is 2.11%, even though the CPI level is 194. The CPI tells us prices are almost double what they were in 2012, but the year-on-year increase is what we refer to when we say that inflation is 2.11%.

The Ministry of Statistics and Programme Implementation (MoSPI) publishes CPI data every month. The RBI monitors it closely to make interest rate decisions. If CPI rises sharply, even due to something like a tomato price spike, it can prompt the RBI to raise interest rates, which affects loans, EMIs, savings returns and overall economic activity.

Can everyday consumers affect global inflation?

Absolutely. When millions of people suddenly start spending more (like after the Covid-19 lockdowns), businesses struggle to keep up with demand. As we saw earlier, this pushes prices higher and is known as ‘demand-pull inflation’. For example, when Americans began “revenge spending” in 2021, global supply chains couldn’t catch up, which drove up the prices of electronics, furniture, fuel and even shipping containers. What you buy, how much and when – these choices affect the entire economy.

Now let’s bring this back to your wallet. Where does Rs 10,000 go in five years?

Similarly, suppose you save Rs 5,000 every month for ten years in a savings account that earns 3% interest. By the end of ten years, you’ll have saved about Rs 7 lakhs. Sounds like a decent amount, right?

But now imagine inflation has averaged 6% during that time. To buy the same things you could have bought with Rs 7 lakhs ten years ago, you would now need over ₹9 lakhs.

So even though your savings have grown in number, their real value has shrunk. That’s the silent, invisible power of inflation – it eats into your future, rupee by rupee.

And this affects your dreams:

The house you planned to buy: Now out of reach.

The college education you thought you’d covered: Now costs double.

The retirement you hoped would be peaceful: Suddenly feels uncertain.

This is why just saving isn’t enough. You need to make your money grow faster than inflation, and that means you’ll need to invest. But every investment carries uncertainty. Risk isn’t something to fear; it’s something to understand.

Credit card is not for impromptu Bali trips. Use it to invest in yourself

This article was first published in the Print, June 16, 2026; https://theprint.in/pageturner/credit-card-bali-trips-invest/2961457/

Credit can be a powerful bridge between today’s desires and tomorrow’s means, but it must be used with care. At its core, credit means borrowing now and agreeing to repay later, with an additional cost known as interest. Lenders—banks or fintech platforms—charge an annual percentage rate (APR) to compensate for the risk of non-repayment and forgo the opportunity to deploy those funds elsewhere.

In a healthy economy, credit fuels growth. Students use education loans to gain skills, businesses tap working-capital lines to bridge seasonal cash-flow gaps, families stretch EMIs over decades to buy homes. However, when credit is misused, debt piled on high-interest credit cards or personal loans, the same tool that creates opportunities can turn into a persistent burden.

Credit-card APRs often exceed 25–30% annually, turning unpaid balances into a mounting liability. Suppose you have a ₹2,00,000 credit card balance at 30% APR. Let’s see what happens if you are not able to pay the full amount on the due date. Let’s assume the minimum payment is 2% of the opening balance. Therefore, you pay ₹4,000.

After paying the minimum, the remaining amount accrues monthly interest. The remaining amount, or the new principal will be: ₹2,00,000 – ₹4,000 = ₹1,96,000 Now let’s add one month’s interest: ₹196,000 × (1+0.025) = ₹200,900. So, after one month, despite paying ₹4,000, you still owe ₹200,900, an increase of ₹900 due to interest. If you again pay only the 2% minimum on the new balance, the process repeats. Thus, it barely reduces the principal and can let your balance and total interest rise over time.

Pro Tip: Before you swipe your card, remember: if you can’t pay your balance in full each month, high‐APR debt can quietly grow even while you’re making payments. Always run these numbers first. You’ll often find it makes more sense to borrow less or choose a lower‐cost alternative. Responsible credit use hinges on three pillars: understanding costs, maintaining discipline and aligning borrowing with your long-term goals.

First, know your APR and repayment terms. A loan or card that seems attractive on an ad may carry hidden fees such as late-payment penalties, annual charges or high default rates, that transform convenience into a trap. Second, treat credit like a knife: indispensable in skilled hands, dangerous when misused. Always ask, ‘Can I repay this in full by the due date?’ If not, reconsider the purchase or seek a lower-cost alternative. Third, use credit to invest in yourself or essential assets—a degree, a home or a temporary shortfall—rather than funding fleeting indulgences, like an impromptu trip to Bali.

Credit scores, summaries of your repayment history and utilisation of credit, determine not only your access to credit but also the rates you pay. Consistently paying on time and keeping utilisation low builds a strong score, unlocking cheaper loans and premium card benefits in the future. Macroeconomic forces shape credit availability and cost.

When central banks lower policy rates to spur growth, borrowing costs fall, making mortgages, car loans and even credit card interest more affordable. Conversely, in times of rising inflation, central banks may hike rates, EMIs on floating-rate loans climb and credit card charges mirror the market tightening.

Economic downturns can trigger stricter lending criteria, as banks guard against rising defaults. Across the globe, credit cultures differ. In the US, credit card penetration is high, and APRs can soar above 20%, yet rewards programmes entice responsible users. In Germany, consumers favour debit and cash, shunning high-interest cards.

In India, soaring education and housing costs have fuelled rapid growth in personal and home loans, even as credit card adoption remains nascent. Understanding your country’s credit norms helps you benchmark your own borrowing habits.

War Chests and Emergency Funds: Why Households Must Think Like Institutions

This article was first published in the Economic Times, April 30, 2026

Periods of geopolitical tension have a way of reminding us how little control we really have. The ongoing conflict in the Middle East, involving Iran, the United States and Israel, is not just a distant headline. It has implications for oil prices, inflation, interest rates and financial markets across the world. For households, these shifts translate into something far more immediate: uncertainty in income, expenses and financial security.

In such moments, one principle becomes particularly relevant. Just as nations and institutions prepare for shocks, households must do the same.

Think Like Institutions: Build a War Chest- In my work with family offices, one idea I emphasise consistently is the importance of maintaining a “war chest”, a portion of wealth set aside in safe and liquid assets. This is not capital meant for growth or return optimisation. It is capital meant for survival, stability and optionality. It ensures that when disruption hits, decisions are not driven by panic.

The same logic applies, perhaps even more urgently, at the level of individual households. Financial resilience is not built in the middle of a crisis. It is built before one.

Your Emergency Fund Is Your First Line of Defence- At the level of the household, the equivalent of a war chest is an emergency fund. Its role is simple but critical. It protects your life when your income cannot.

It absorbs the shock, allows you to maintain continuity, meet obligations, and most importantly, think clearly about your next steps. The triggers may vary, a macroeconomic slowdown, job loss, health emergency, or a broader systemic event such as a pandemic or financial crisis. What unites these is their unpredictability and their ability to disrupt cash flows.

How Much Is Enough Depends on Your Reality- There is no single number that works for everyone, but there is a guiding principle. At a minimum, three to six months of essential expenses such as rent, food, utilities, healthcare and loan repayments should be non-negotiable. For those in volatile industries, with variable income streams, or with significant dependents, a longer buffer of twelve to twenty-four months is prudent.

This is where risk is often underestimated. Income is treated as stable until it is not. Entire sectors can slow down simultaneously. Hiring freezes, delayed payments and business contractions tend to cluster in times of stress.

The real question is simple: how long can you sustain yourself if your income stops tomorrow?

Safety and Liquidity Matter More Than Returns- Equally important is where this fund is held. An emergency fund is not an investment strategy. It is a protection strategy. The purpose of this capital is not to grow, but to be available when needed, without loss of value. In periods of stress, liquidity becomes more valuable than return.

Funds locked in real estate, equities, or long-term instruments defeat this purpose. Instead, this reserve should be held in low-risk, highly liquid options such as savings accounts, liquid mutual funds, or short-duration deposits.

There is also a behavioural dimension. Without a buffer, households are forced into unfavourable choices, selling long-term investments at the wrong time, taking on expensive debt, or cutting back on essential spending. With a buffer, decisions become measured rather than reactive. Time, in a crisis, is an asset. Liquidity buys that time.

Conclusion

The current global environment is a reminder that volatility is not an exception. It is a recurring feature of economic life. While we cannot control geopolitical events or macroeconomic cycles, we can control how prepared we are for them.

A war chest does not eliminate uncertainty. But it ensures that uncertainty does not dictate your choices. Because when disruption arrives, as it inevitably will, the difference is not in the event itself. It is in how prepared you are to face it.

Perspectives on the Banking Dilemma in India: A Q&A with Vivek Kaul

This interview was first published in Risk Intelligence on March 5, 2021; https://www.garp.org/#!/risk-intelligence/credit/counterparty/a1Z1W000005krEZUAY

Recent projections by the Reserve Bank of India confirm that non-performing loans remain a significant hazard for banks. What are the origins of this risk, what’s the connection to COVID-19, and what are the prospects for India’s economic recovery?

Bad loans and deteriorating asset quality continue to plague banks in India. Last September, the gross non-performing assets ratio (GNPA) at Indian banks stood at 7.5%, but that number potentially could double in just a year’s time.

In its recent financial stability report, the Reserve Bank of India estimated that Indian banks’ GNPA ratio could increase to 13.5% under a baseline stress scenario and 14.8% under a severe stress scenario by September 2021. What’s more, for public-sector banks (PSBs), GNPA may rise to nearly 18%.

Vivek Kaul, the author of Bad Money: Inside the NPA Mess and Hot It Threatens the Indian Banking System, is a well-known commentator and podcaster who has written several books on India’s economy. He talked with Risk Intelligence about the NPA dilemma, the impact of COVID-19, default risk, regulatory flaws, and India’s path to economic recovery.

Risk Intelligence (RI): Can you pinpoint the primary reason for the bad debts and non-performing assets (NPAs) in India? Where does the fault actually lie?

Vivek Kaul (VK): If you look at the current phase of bad loans, which have accumulated over the last five years, I think the main reason for that lies in the period pre-2008. Between 2004 and 2006, the Indian economy grew by greater than 9% annually, resulting in a great deal of optimism among the politicians, bankers, businessmen, entrepreneurs and the public, in general. Suddenly, there was this story going around that India will be the next China, which basically meant that since China was growing in double digit rates, India would follow a similar path.

Entrepreneurs and businesses saw an opportunity. They believed that the growth would fuel demand for goods and services. They started to invest in the infrastructure that would drive this growth and fulfill the demand. The data between 2004 and 2008 shows that the loans to industry given by banks in India went through the roof, and that is where it all started:  the belief that India would continue growing at 9%.

RI: In India, the government uses PSBs to increase the money supply in the market. The latest financial stability report of the RBI, released in January 2021, says that the GNPA ratio of PSBs may increase to 17.6%. That number is frightening.

VK: It needs to be mentioned that if you calculate the numbers properly, they are even worse. What has happened is that the categorization of IDBI Bank - which was by far the worst-performing PSB, with a very high NPA of almost 32% - has been changed to that of a private bank. IDBI has NPLs of close to ₹500 billion, but these are now categorized by the RBI as the bad loans of a private bank, rather than a PSB.

Another well-kept secret of banking in India is that once a bad loan has been on the balance sheet of a bank for four years, it can be written off. After that period of time has elapsed, the loans drop from the balance sheet of the bank, reducing the bad-loan numbers for PSBs.

Moreover, Indian banks have a very low recovery rate of bad loans. Once you take these factors into account, it gives an entirely different dimension to the story.

Here’s what will happen: the bad loans that were recognized, let's say, in 2016, 2017, and 2018, will keep getting dropped off from the balance sheet of banks in the next couple of years. This will lead to the bad loans number coming down in the 2020-2021 financials of the banks. But there will also be fresh bad loans, which we will start to see on account of COVID-19.

RI: You mentioned about the mid-2000s and the optimism that followed. But then the global crisis happened in 2008, which led to the optimism not being there. What do you think the spirit of the times now is with the COVID-19 slump and recession? How will it impact the mess further, and what will recovery look like?

VK: This time around, the issue is a little different. Common sense tells us that this time there will be retail defaults, as well corporate defaults, because salaries have been slashed and people have lost jobs. The entire informal sector has seen huge destruction.

The data for listed Indian corporates for the quarter July to September 2020 actually shows that their profits went up, mainly because they have cut down their costs. But when a corporate cuts costs, someone else's income is being impacted.

For example, if you're a corporate who's making profits, and you've managed to cut down on your raw material costs, some supplier somewhere is seeing reduced business.  As a consequence, that supplier is likely doing the same thing with some of its third-party vendors. The impact is felt across the hierarchy, and that’s problematic.

We haven't yet begun to see the impact of this, because there is a case going on in the Supreme Court about whether the interest on loans during the COVID-19 months should be waived. Until that decision arrives, banks are not allowed to recognize defaults as bad loans. So, will we come to know how bad the defaults situation is at PSBs only after the Supreme Court hands down its decision.

It is also important to remember that more than 50% of all retail loans are home loans, and people will try their best to not default on home loans. So, that is a very good thing going for banks. But the other kinds of loans – e.g., credit card debt, personal loans, consumer durable loans and auto loans - will see an uptick in the defaults.

RI: In this case, culture could also play a big role, right?  In the U.S., the subprime crisis was essentially driven by home-loan defaults, but in India, people probably try to hold on to their homes more dearly, correct?

VK: Yes, the stigma of losing your home is huge in India. People will try selling everything, defaulting on everything else before they default on their home loan.

The other good thing is that even if people default, banks may not lose much. The first reason lies in the loan-to-value ratio (LTV). The LTV of entire home-loan business in India is between 65% and 70%, giving some margin to the banks.

What’s more, over and above the registered price of a house, in many parts of the country, there is a so-called “black portion” in mortgages, which gives a bank the right to recover most of the home loan, if defaulted, by selling the house.

RI: You mentioned in your book that there was an era of easy money in the Indian financial system in the aftermath of the financial crisis of 2009. Do you predict the same will happen after COVID-19?

VK: That is already happening. The amount of money floating around right now is just humongous.

Banks don't know what to do with it. That is clearly visible in the fact that, one, they’re depositing billions of rupees with the RBI to the reverse-repo window, because they don't have any use for that money.

There is indeed a huge amount of liquidity in the system. Some of this has been driven by the RBI printing money, some of it has been driven by the fact that the psychology of a recession is totally in place.

Even though interest rates are falling, people want to save money with banks as deposits because, as of now, they are more worried about return of capital than return on capital.

People are scared. They have lost jobs, and salaries have been cut. Even for those who have not been economically impacted, the psychology of fear is at play, given that everyone wants to be prepared for a situation where, say, jobs are lost, and they are unable to find new positions.

Businesses are not borrowing, too, because with private consumption coming down, there is no need for businesses to borrow and expand. All these factors have come together, and there is consequently a huge amount of liquidity in the financial system.

RI: What can you say about India's path to economic recovery and the current so-called technical recession that we are in? How does it compare to other countries?

VK: The Indian economy contracted by around 15.7% during the half-year from April to September of 2020. In between April and June, we were right at the bottom. Between July and September, we were in the bottom quartile, though not right at the bottom. There were countries, like Chile and UK, which performed worse than India.

Now, to answer your question about when the economy will recover and when growth will go back into positive territory, there are varying opinions. But what most people are not talking about is the fact that India will not return to its 2019-20 GDP level until either late 2021 or early 2022, at the earliest. By the time we see this return, moreover, we will have lost two years of economic growth.

Another point to keep in mind is that a lot of this economic contraction is not simply because of COVID-19. The economy had been slowing down much before the pandemic struck. Indeed, if you look closely at the data between October and December 2019, India grew by just 4%. So, issues which were plaguing the Indian economy, even pre-pandemic, will now only get worse.

For example, the investment-to-GDP ratio has been falling in India since 2012, and that is not going to improve anytime soon. A lot of growth that is happening, or will happen, is basically jobless growth.

The rate of unemployment has been coming down, but how that rate is coming down is very interesting. It is because the labor force participation rate - proportion of the population that is looking for jobs - is also declining.

What that means is that many people who have been unable to find jobs have stopped looking for a job, and, hence, have dropped out of the labor force. This is a very worrying trend, because India anyway has a low labor force participation rate (especially among women), and I think this will only get worse post-pandemic.

The growth will eventually come back. For an economy of India’s size, people will eventually consume and spend money, and we can debate about t when this will happen. But long-term growth prospects of India have now, I think, been hurt, and all the talk of 8%-9% growth is overly optimistic. At this stage, even a 6% growth rate will be brilliant for India.

NPAs are everybody's problem

This book review was first published in Business Standard on July 10, 2020; https://www.business-standard.com/article/beyond-business/npas-are-everybody-s-problem-120071000014_1.html

Vivek Kaul's Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System provides the answer and I am wiser years after having taken the loan

Book: Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System

Author: Vivek Kaul

Price: Rs599/-

Pages: 339

Publisher: Harper Business, an imprint of HarperCollins Publishers

When I was a fearless in twenties something, sometimes broke, research scholar, I went ahead and bought an under construction flat. I took on a home loan that covered 85% of the cost of the flat and a personal loan that covered the remaining 15% that was used for the down payment. After paying the EMIs, I would have barely enough to pay my share of the rent of a 500sft apartment shared by 3 or sometimes 4 friends and eat three square meals a day. I had started walking longer distances instead of taking autos, I stopped going to the Café Coffee Day and for shopping, unless for essentials. I sold the apartment soon enough at double the price.

In the recent years, whenever I have taken a loan, bogged down by the paper work, my thoughts always go back to those days and I always wonder how did someone like me, with no guarantors, on a stipend (not even a salary) and no credit history ended up getting the loans back then?

Vivek Kaul’s “Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System” provides the answer and I am wiser years after having taken the loans. Those were the years, 2005-06, when the bad loans rate was below 5 percent and hence the banks had “decided to go easy on their lending” and the growth rate of lending was highest around this time.

Last year, a friend lost her job and defaulted on the EMIs of her car loan and after the fifth month of default, two employees of the bank came and took her car away. She asked me, “How is it that Vijay Mallya and Nirav Modi get away but people like us can’t?” I had jokingly replied, “well you could get away too if you absconded to another country with the car.” Last week, I asked her to read Kaul’s book in which he lucidly explains why ‘If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has,’ as John Maynard Keynes had remarked and modified by the Economist [magazine] as “If you owe your bank a billion pounds everybody has a problem.” She read the book and called to thank me for suggesting it.

As evident from the above examples, Kaul’s book, if read with the attention it deserves, helps everyone, not just the economics and finance students and practitioners, to understand how developments in the banking sector and the various cycles of lending, NPAs and regulations have implications for everyone. The decisions taken over time slowly and steadily weave an invisible mesh of mess that gets noticed only when someone like a Mallya or a (Nirav) Modi gets trapped in that web and catches the imagination of the nation. How does this mesh get woven? That is what Kaul traces and explains in his book.

“Bad Money” is a focused saga of the banking system in India that includes the creation and evolution of the public sector banks, nationalization and privatization, regulations by the Reserve Bank of India such as the Insolvency and Bankruptcy Code, 2016 and how the politics too played out along the way. It goes back and forth like a “Tarantino movie”, as Kaul puts it, goes into the back stories, the sub-plots and the numbers that substantiate the stories.

The problem with the book lies in its strengths. The book is focused and hence it may not seem appealing to readers who look for more broad-based books on the economy and the financial system. However, once they pick up the book, they will find that it does take an overall view of the financial system while keeping the banking system at the centre. The book also throws a lot of numbers and graphs at the readers that may act as speed breakers, in an otherwise fast paced book, while reading though they make the book more authentic in its analysis.

The book is a one stop shop for anyone looking for references on the Indian banking system. One can only marvel at the number of books, monographs, articles, and documents from various websites that have been referred to. Anyone researching related topics need not look elsewhere and may be able to add only a “delta approaching zero” to what Kaul has written. This book organises the messy material and presents the “long and short” of it in a readable, understandable and relatable manner.

The Impact of the Coronavirus on Investment Decisions

This article was first published by the Global Association of Risk Professionals, Risk Intelligence, on June 19, 2020; Co-author: Anisha Sircar; https://www.garp.org/#!/risk-intelligence/market/investment-management/a1Z1W000005VYeIUAW

As the world heads toward a global recession, with plunging equity markets and countries facing severe economic downturns, there are uncertainties and strong beliefs that have practically divided the world into the optimists and the pessimists. There are those, for example, who make rash, seemingly opportunistic investment decisions, and those who are more measured in their financial approach. Those who unwittingly indulge in herd behavior, and those who are less prone to such external influences.

What's more, there are those who are extremely cautious, favoring extended lockdowns and total isolation, versus those who have a more “que sera, sera” approach to COVID-19, supporting getting back to normal as early as possible.

It's easy for one group to feel that the other group is being unreasonable. The pandemic's unprecedented impact on our lives, both in the short and the long run, makes people highly susceptible to making decisions they would have otherwise avoided.

In this article, we reflect upon the financial and investment decisions being made by people in the backdrop of the pandemic, and the dichotomy facing risk managers and investors. What are the obstacles standing in the way of investors making rational decisions and avoiding unnecessary risks in a time of crisis?

Bias

When analysts, policymakers, “experts,” and/or news reports offer statements and opinions, it's sometimes assumed that they know what they are talking about. However, people find opinions credible as long as it confirms their own thoughts or anxieties, or as long as they seem like “educated” or even consensus-based guesses. This can involve a range of biases, from herding behavior, to action biases, to confirmation biases.

When COVID-19 hit markets, it resulted in phenomena such as dwindling risk appetite and investor interest and declines in the perceived values of stocks. That led to dramatic drops in stock prices, wiping out any potential investor gains.

Herding behavior is tricky with respect to risk appetite and investing. It drives markets toward excesses during market upturns and nose-dives during downturns. It's why stock indices in India, the U.S. and Europe plunged, especially between mid-February and mid-March this year, and why circuit-breakers were triggered several times in recent months.

In India, the major indices lost 40% in just two months. While it might be natural to get carried away with all the noise and the herd, turbulent times like these call for more reflection, rather than panic selling. Investors in countries like India have been used to more euphoric highs over the last few years, and the losses on investments therefore now seem particularly painful.

Markets in India spiraled almost immediately into a “bull phase” in a fortnight, recovering 20% from the bottom. However, it's important to keep in mind that, by and large, market indices have rebounded and hit new highs after every previous global financial crash. So, despite the noise, this may be the time for anxious decisions to hit pause.

Shortsightedness

In 1995, Shlomo Benartz and Richard Thaler conducted a study titled, “Myopic Loss Aversion and the Equity Premium Puzzle.” The researchers asked: How much will the equilibrium equity premium fall if the evaluation period (of a portfolio) increased? In other words, is checking and re-checking your portfolio beneficial or detrimental to how well it does?

Their research found that more frequent checkers show considerably lower portfolio performance over time. “In a sense,” they concluded, “5.1% is the price of excessive vigilance.” Long-term profits can be found where there is courage to move away from the crowd — and think long-term.

On the other hand, there are those who did bottom hunting when the markets crashed and are now raking in the moola.

In essence, investors who hit the pause button (the que sera, sera group) felt that those who were rebalancing their portfolios were being myopic; on the other hand, those who were actively trying to buy and sell thought that the other group was simply being “stupid.”

However, in the end, every investment decision needs to incorporate the risk appetites and the risk-taking capability of people. Someone may have a higher risk appetite – but if the capability to absorb a huge loss is low, then wait-and-watch is perhaps a better approach than investing in uncertain times.

Overconfidence

Psychologist Daniel Crosby believes that uncertainty often leads to two kinds of behaviors —compensatory over-confidence or worst-case scenario thinking, neither of which results in smart financial choices.

While the volatility in markets during the pandemic may be partly attributed to panic, investor overreaction (which led to excessive trade volume) was certainly another cause. This is reflected in how markets have periodically surged because of overconfidence about the worst of the virus having passed.

Shortly after these surges, indices are found plunging back down again. The phenomenon is also reflected in how “experts” have been making a variety of assertions in the recent weeks, guaranteeing that investors will be spared the pain that others may be experiencing.

Overconfident people, write researchers Mao Zhang and Yi-Ming Wang, “may perceive themselves more favorably than others perceive them, or they may perceive themselves more favorably than they perceive others. (…) It is common for most people to rank themselves as better than the median.” Moreover, they note that it's also “common” for men to trade more excessively than women, and for individual investors to show more confidence than institutional investors.

This plays a significant role in market volatilities, because overconfident investors are usually quick to buy on margin ahead of a stock market crash. In the run-up to the Great Depression, the “Roaring Twenties” saw a lot of overconfidence, and several investors used large margin positions to leverage their beliefs. But this caused an asset bubble, and when the depression hit, they lost everything they owned. Indeed, they even owed large sums of money, ultimately leading to banks having to declare bankruptcy — and everybody losing.

The takeaway? Avoid overconfidence: think long and hard before buying on margin in uncertain times if you don't have the appetite to stomach a huge loss.

Faulty Forecasts

“Experts” have made an array of predictions, ranging from global economic agencies projecting India's potential economic recovery to analysts saying the global economy will bounce back in the next financial year. These forecasts assume that central banks will cooperate and offer a way out, and that currently spooked investors will react to the rescue and re-enter the market. But as we have seen in the past, people can just as easily do the exact opposite, crisis or not.

In a pandemic, the seemingly opposite behaviors of people get amplified. Everything starts to seem black and white to people, but markets and behaviors actually remain grey and complex, interacting with each other in intricate ways.

Parting Thoughts

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Who Will Act on Income Inequality?

Because of its far-reaching consequences, governments must be involved

This article was first published in GARP, Risk Intelligence on June 28, 2019. Co-author: Sai Nitya Bodavala; https://www.garp.org/#!/risk-intelligence/all/all/a1Z1W00000551qTUAQ

In his victory speech on May 23, 2019, India's newly re-elected prime minister, Narendra Modi, said that “from now on, India will only have two castes: the poor and those that want to remove poverty.”

Historically, the Indian government focused policymaking on alleviating the social inequality cemented by caste differences. The primary focus was bridging the gap between the upper and lower castes through financial and educational parity, like reservations in educational institutions and government jobs. Of late, however, there has been a shift to targeting policies to inequalities presented by income.

India began to face issues of heightened inequality post-1991, when economic reforms and liberalization were initiated, ending the license-quota regime, following a balance of payments crisis. Pre-reform, the public sector ensured that resources were diverted to those geographic areas that required them, and thereby leveled the playing field. After the private sector entered the playing field, however, things changed. The private sector focused on cutting costs and profit-making. Businesses moved to more developed areas where access to resources was easier and cheaper. This led to regional income inequality.

During its last tenure, the National Democratic Alliance (NDA) government, led by Modi, targeted income inequality with a bill that aims to introduce a 10% reservation in jobs and educational institutions for those belonging to the “economically backward” sections of the general category. Economically backward is defined as families receiving less than Rs. 800,000 of income per annum and possessing fewer than five acres of land, in addition to other measures based on residence.

In the recently held elections, the Congress party's manifesto also incorporated an element that aimed to do the same. It proposed the Nyuntam Aay Yojana (NYAY) scheme, according to which 50 million of the poorest families in India would receive Rs. 72,000 a year. It was assumed that each family has at least five members, meaning that 250 million people would benefit – if the Congress party had come to power and implemented scheme.

UBI and Wealth Taxes

India is not alone in moving toward policies that aim to reduce income inequality. Andrew Yang, a candidate for the Democratic presidential nomination in the United States, has based his campaign on the idea of Universal Basic Income, which guarantees to each adult a certain amount of money per month. Yang proposes to pay for UBI through a value added tax (VAT) and the revenue from the envisaged increase in productivity from receiving an unconditional cash transfer.

Billionaire philanthropist Eli Broad, writing in the New York Times, said, “Our country must do something bigger and more radical [than steps such as raising the minimum wage and building affordable housing], starting with the most unfair area of federal policy: our tax code. It's time to start talking seriously about a wealth tax . . .

“Don't get me wrong: I am not advocating an end to the capitalist system that's yielded some of the greatest gains in prosperity and innovation in human history. I simply believe it's time for those of us with great wealth to commit to reducing income inequality, starting with the demand to be taxed at a higher rate than everyone else.”

If governments are attempting to curb income inequality, it is only right to explore why.

The Bigger Picture

The Gini coefficient is used to measure income inequality. On the scale of 0 to 100, 0 is perfect income equality, with everyone receiving an equal amount. At 100, there is perfect inequality, with one person receiveng all income.

Studies have found that low levels of income inequality may actually be beneficial for the economy.

Income inequality denies educational and culturally stimulating opportunities for children from low-income households. This deprivation keeps them from obtaining relevant skills that the job market requires, making them less employable. They end up being paid low wages.

The wealthy, meanwhile, produce with the intention of earning profits. If the masses cannot afford to buy what is produced, the wealthy suffer losses, leading to their inability to reinvest, and making the economy worse off. Income inequality at a level below 27 on the scale allows for entrepreneurs to invest more into their businesses, thereby allowing for greater economic growth. On the other hand, a high level of inequality has a snowball effect, with negative repercussions for all.

A 2015 study by the Organisation for Economic and Cooperation and Development (OECD) found that between 1990 and 2010, the rising income and wealth inequality in the U.S. “knocked about five percentage points off cumulative GDP per capita over that period.” It is thereby a misconception that income inequality is an issue only of those in the low-income bracket. It affects the economy as a whole.

Crime

A paper by Nobel Prize-winning economist Gary Becker, “Crime and Punishment: An Economic Approach,” posited that wherever there exists a large gap between the poor and the rich, there is bound to be higher crime. OECD's 2013 How's Life report also noted that “socio-economic inequality seems to play a central role in the occurrence of criminal victimization as disadvantaged people are more likely to perpetrate and to be victims of crimes.”

Those in the lower-income bracket become vulnerable in that they are unable to access the resources that are abundantly available to those with money. This vulnerability manifests in two ways: they may either take to crime in order to meet their needs, or become victims of criminal activity because they do not have the means to protect themselves.

According to Martin Daly, professor emeritus of psychology and neuroscience at McMaster University, inequality predicts homicide rates “better than any other variable.”

Health

In countries where the burden of paying for health care rests with individuals, an unforeseen expense can spell disaster for a low-income household. This could lead to compromises being made on the safety assured by an established medical practice that is expensive, in favor of one that is cheaper.

Aside from the issue of affordability, a 2017 World Health Organization and OECD report shows that in countries where the income gap between the 10th and the 90th percentile of the populace is very wide have higher rates of infant mortality.

Mental health also suffers as a consequence of inequality. It was found that with an increase of 0.2 of a country's Gini coefficient, there were eight more incidences of schizophrenia per 100,000 people.

Caste

According to the 2018 World Inequality Report by the World Inequality Lab at the Paris School of Economics, the top 10% in India control 55% of India's total wealth. In light of this undeniable problem, we may not, however, conclude that caste can no longer be a basis for identifying inequality. Caste has been and continues to be a basis for discrimination and ill-treatment in India. The ill-effects of negative discrimination based on caste and those of income inequality are similar. The effects include being denied social mobility, occupational mobility and access to basic resources.

The intrinsic link between income inequality and the caste hierarchy can be seen in the table.

	Scheduled Caste	Scheduled Tribe	Other Backward Castes	Forward Caste (Brahmin)	Forward Caste (Non-Brahmin)	Muslim	Average
Annual Consumption of households in Rupees	89,356	75,216	104,099	167,013	164,633	105,538	113,222

Source: The Economic Times

It is evident that those who belong to the backward classes spend (consumption as a proxy for income here) far less than those belonging to the forward caste categories, as well as the average. It is also interesting to note that religious minorities such as Muslims also earn less than the average.

There exists a simplistic notion that taxing the rich and handing money to the poor is an effective solution for income inequality. It is erroneous. Income inequality is a result of problems and prejudices that are far more deeply rooted, such as the torment inflicted by the caste system. Both must be tackled simultaneously, since continued discrimination based on caste will only impede progress made on the income equality front. 

Lack of Reliable Data

Most studies in India, such as those of the National Sample Survey Office (NSSO), focus on consumption or wealth rather than on income. Official estimates of inequality present a picture that doesn't seem alarming, while other surveys, like those of the India Human Development Survey (IHDS), present a high number.

To add to the confusion, People's Research on India's Economy (PRICE) found that the number may be lower than what the IHDS suggested. The different methods by which studies gather data on income are bound to suggest varying figures for inequality. Some studies rely on tax filings, some on survey data and others on national statistics. The paucity of accurate data implies that the policies implemented may not yield optimal results.

Conclusion

Income inequality is today's reality. Considering how important parity is for the development of the country, the issue must be continuously addressed in order to be mitigated.

In the past, the Indian government has dealt with income inequality by providing employment opportunities and direct benefits, while private players have managed to contribute to the shrinking of this chasm through corporate social responsibility (CSR) activities. The evidence suggests however, that the government schemes could be better implemented and thought out.

The NDA government showed intent to overcome this issue in their previous tenure, and Modi's speech has inspired confidence that they intend to carry out their promises in the next five years. All that is left now is for them to act decisively and show lasting results, because although the private sector has a role to play, the ultimate responsibility of dealing with income inequality must lie with the government.