What a high inflation rate does and presents some tips for investors
Inflation has been tricky ever since the global economy came out of recession. The inflation rate is high in most emerging nations while it is still under manageable limits in developed nations. There are many factors - global as well as domestic - that are contributing to the high inflation rate, and that is why it is difficult to get a handle on the situation.
In India too, inflation has been at high levels since the beginning of last year. The initial wave in inflation was fuelled by rising prices of food articles in the beginning of last year. However, the later triggers include rising fuel prices in international markets, rising prices of non-food articles, manufactured goods and cascading effect of price rise in related products. The latest trigger, in the beginning of this year, was again provided by the rising prices of basic food articles. Analysts believe inflation is likely to remain firm in the short to medium terms and it requires a combined effort on various policy fronts to control the situation.
These are some of the prime factors that are expect ed to influence the inflation rate in the short to medium terms:
Commodity prices
As the global economies are recovering, the prices of commodities such as fuel, metals etc are expected to rise due to improved demand. Higher prices of commodities can influence the inflation rate here.
Supply chain
The supply chain inefficiencies, and speculation in agricultural commodities and food articles, have already triggered panic in the recent past and could be another factor that can influence inflation, going forward.
Cascading effect
The cascading effect of high prices of international commodities and food articles, as well as higher interest rates, is another factor that can influence the inflation rate.
Monetary policy tightening expected
A situation of high inflation is quite complex and it does not look like it will come under control in the near term. The government and the Reserve Bank of India (RBI) have already raised their expectation levels from 5.5 to seven percent by March this year. The implications of a higher inflation rate are quite widespread, especially for the economically-weaker sections.
Uncontrolled inflation is destructive for the economy as consumers and investors change their spending habits. However, analysts believe the RBI will further tighten the monetary policy to control the rising inflation rate.
Here are some tips for investors in times of high inflation:
Track rate-sensitive sectors
Inflation influences the market sentiment, and therefore, in general, investors should remain cautious, as the market valuations are quite high at the moment. In the absence of other positive factors, the markets will tend to come down due to these negative sentiments.
In addition to the general market direction, investors should remain cautious on their positions in interest rate-sensitive sectors.
Debt looks good
Due to the rising interest rates, debt instruments have come back in favour. Those with lower risk appetites should look at increasing their portfolio allocation to debt instruments. They can also look at diversification of their debt portfolio by investing in instruments such as gold and silver which have a better outlook in the short to medium terms.
Not a good time to borrow
The environment has turned unfavourable for borrowers. The interest rate on almost every loan scheme has gone up and those with large loans are facing the heat of higher EMIs.
Since the higher interest rates are going to stay for some time, it is advisable to look for alternatives to augment income or reduce the loan burden through a partial prepayment.
