Inflation in emerging markets, including India, has been ruling high since for the past year. In India, the Reserve Bank of India (RBI) has taken some steps including tightening monetary policy and raising interest rates six times to control inflation. The inflation rate came down towards the second half of last year, but the price of food articles and some essential commodities have again started going up last month.
Food inflation touched a 52-week high level and analysts believe that it will soon spread to a broader basket of items and result in higher Wholesale Price Index (WPI)-based inflation.
These are some of the direct and indirect implications of a higher inflation rate:
Interest rate hardening
The RBI has already done multiple rounds of monetary policy tightening. The interest rates have already gone up a couple of percentage points across the board. It is quite likely RBI would have to further increase the interest rate in its policy review due towards the end of this month.
For you, it means higher EMIs on your loans.
Impact on stock markets
The rise in inflation impacts market sentiments. Higher inflation helps in driving the interest rate higher and hence borrowing becomes costly, both from market or financial institutions. The valuation of capital-intensive companies and sectors comes under pressure as their margins decrease under higher interest burden. Therefore, higher inflation influences the outlook for interest-rate sensitive sectors in the stock market.
Commodity prices
The price of many essential and primary commodities has shot up many folds in the last few quarters. Food inflation has again hit the 20 percent mark. People of every income category are facing the brunt of rising prices.
Strategies to cope with inflation
High inflation is quite a complex situation and is unlikely to come under control in the near term. The implications of higher inflation are quite widespread, especially for the economically weaker sections of society. Uncontrolled inflation is actually destructive for a country as it de-stabilises the economy, as it leads to consumers and investors changing their spending habits.
Here are some strategies you can adapt in the current situation:
Strategies for equity investors
Inflation influences market sentiments and investors should remain cautious as the valuations are quite high at the moment. In the absence of other positive factors, the market tends 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.
Strategies for debt investors
Due to higher rate of inflation, most debt market instruments have become unattractive as real interest rate (interest rate after factoring the rate of inflation) has gone negative. Investors in debt instruments should exercise patience and diversify part of their debt into other instruments like gold and silver which have a better outlook in the short to medium terms.
Strategies for borrowers
The environment is quite bad for borrowers. Interest rates have gone up across the board and people with large loans are paying higher EMIs. Since higher interest rates are here to stay for some time, it is advisable to look for alternative sources of income or reduce the loan burden by partial prepayment.
