INDIANS are no strangers to inflation that eats into our savings. But unfortunately, most of us don't do enough financial planning to protect against rising inflation as we are unaware about the long-term implications of high inflation on our personal finances. India is structurally prone to high inflation like the one we have been witnessing in the recent past because, as a country we generally spend less money on building infrastructure or increasing manufacturing capacities. We rather spend more on giving subsidies and spending the borrowed money on meeting avoidable revenue expenditures. In India, inflation was always restricted to non-food items till a few years ago and, hence, for a normal middle-class family it really did not pinch much.
With rising incomes across classes leading to higher quality of life, even food inflation has started to impact the day-to-day life of the common man. Food inflation is a relatively new phenomenon and is here to stay because of government schemes like NREGA, higher minimum support price (MSP), rising per capita income, etc. In other walks of life too, we find that a given amount of money is not able to buy the same amount of things it used to earlier — essentially money is losing its purchasing power.
If the consumer price index (CPI) — which is a better measure to use for personal finances than the wholesale price index (WPI) — is currently ruling at 13% and you put your entire savings in fixed deposit earning 8-9%, you get back money which buys fewer things than it would have one year ago. How do we counter/hedge ourselves against the ever rising inflation? In such a scenario, hard assets like property, precious metals etc. may turn out to be credible investment options considering that its value goes up with rising inflation.
By now you would have understood that it is important to choose the right type of savings instruments. Please note here, that the hard assets we have described above are classified as savings and not necessarily as expenditure for the sake of fighting inflation. So they have to be seen in the perspective of savings and compared with the interest rates offered on bank deposits (the traditional saving instrument for us Indians). Precious metals like gold and silver have historically outperformed inflation and are a very good hedge for any investor against rising prices. If investing in physical gold poses problems like storage and getting the right quality, then gold can be bought in the demat form. It is also available through stock exchanges in the form of exchange traded funds (ETFs). Such a method of owning gold is much more convenient (neither do you have to worry about the quality nor haggle over the price and there's no need to physically visit a goldsmith/jeweller) and safe too (no storage required, no threat of being stolen/lost). With inflation becoming sticky in nature, banks will have to start raising their rates and we believe deposit rates may go up by another 100 basis points before this financial year is over. So, investors can wait for interest rates to go up before locking into fixed deposits. A prudent combination of higher fixed deposit rates and investment in hard assets may help the investor to hedge against
