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

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
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