Skip to main content

Inflation & You

   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.

 

Popular posts from this blog

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Stock Dividend Yields

During a bull run, it’s very easy to ignore stocks with high dividend yields. After all, what could be more enticing than a growth stock? But in times of crisis, these boring ones tend to be the most sought after. The reason being that not only do dividends provide a cushion when the market is in the doldrums but such stocks also tend to fall less. The lure of dividend yield stocks is not easy to ignore. These stocks offer capital appreciation as well as cash payments. But logically, any company that pays a substantial portion of its earnings in dividends is reinvesting less and, therefore, would grow at a slower pace. So the trade-off is between higher dividend yields for lower earnings growth. On the other hand, companies with high growth potential and volatile earnings tend to pay less by way of dividends, if at all. Such companies would rather reinvest their earnings to sustain their growth. The capital appreciation of growth stocks is obviously higher than in dividend yield ones. ...

Women need to plan for Retirement

Plan for Retirement Online       Higher life expectancy, lower pay and fewer work years necessitate thorough planning.   Women have raced ahead of men in various fields but, when it comes to retirement planning, they tend to lag behind. Despite saving a higher proportion of their salary, compared to men, women generally do not take retirement planning seriously. Below are some of the reasons why they should: According to the United Nations Department of Economic and Social Affairs, in India, the life expectancy of women is 69 years and, of men, it's 66 years. Due to this, a woman will need an additional `55 lakh to manage her living expenses (see table).Besides, usually, women work fewer years compared to men to take care of children and family.Further, a recent study by Korn Ferry Hay Group shows that women in India earn 18.8% less than men. Not to mention, a higher life expectancy can also mean higher medical expenses as the likelihood of health ailments such as diabetes, high...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now