Skip to main content

Deflation - Economics of lower inflation

There are chances of the economy moving into deflation. Here we outlines some implications

The stock markets had a few surprises last week. Here, the inflation rate fell to historic lows. The market participants were now foreseeing a possibility of inflation hitting zero. It just showed how times had changed in a short span of a few months.

Just a while ago, investors were praying for lower inflation numbers every Thursday. But the consistent decline in the inflation numbers has left them pondering whether they got more than what they had bargained for, as India may experience negative inflation WoW soon.

What is deflation?

A temporary dip into the negative side will not be immediately considered as deflation. Deflation should not be confused with a temporary fall in prices. It is a sustained fall in prices that occurs when the inflation rate passes down below zero percent. In a deflationary environment, the price of goods and services keep falling. Hence, consumers have an incentive to delay purchases and consumption until prices fall further. This in turn reduces the overall economic activity.

There is a fall in the quantum of goods and services the whole economy is willing to buy, and the price they are willing to pay for goods and services. Since this idles capacity, investments also fall, leading to further reductions in aggregate demand. Deflation also has the side effect of increased unemployment since there is a lower level of demand in the economy. A lower employment level further slows down the demand, thereby contributing to the deflationary spiral.

The appearance of deflation as a widespread global phenomenon is indeed disturbing, not only because of its immediate economic implications, but because until recently most economists regarded sustained deflation as a fundamentally implausible prospect.

Deflation increases purchasing power

Deflation increases the real value of money. It benefits savers and of holders of liquid assets and currency as the real value of liquid assets and currencies keeps increasing as time lapses. On the other hand, it erodes the wealth of investors who have invested in illiquid assets, and borrowers as the value of money invested in an illiquid asset today will be worth less as time goes by.

It also amplifies the quantum of borrowings and is a significant disincentive to borrowers. The payments one is making in the service of a debt represent a larger amount of purchasing power than they did when the debt was first incurred. Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. It increases the purchasing power of money as time goes by. However, it can cause hardship when the majority of one's net worth is held in illiquid assets.

Way out of deflation

Deflation, at least in theory, is easy to prevent. The government has to just print more money. Printing money is normally a pleasant experience for all governments. Printing more money increases the quantum of money in circulation making it easy for people to spend.

Another measure to counter deflation is monetary policy operations by the central bank. By buying government bonds they increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because it increases profits and takes some of the depressive pressures off wages and debtors of every kind.

Impact on investor

Hence, there could be more rate cuts and monetary easing from the Reserve Bank of India. The markets are factoring in a rate cut of 100 basis percentage points. Monetary easing could also take the form of buying government bonds in open market operations.

For individual investors, it also implies that the days of high deposit rates of 10-12 percent are a thing of the past and they will get lower returns on their deposits and fixed instruments. Individual investors who have invested in fixed deposits and bonds will find the intrinsic value of the instruments will increase during deflationary periods.

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot]
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