These are some of the main factors that are expected to influence the inflation rate in the short to medium terms here:
Commodity price
As the global economies are recovering, the prices of global commodities such as fuel and metals are expected to rise due to more demand. Higher price in international commodities is a major factor that can influence the inflation rate here.
The cascading effect of high prices in international commodities and food articles, and high interest rates, on the manufacturing sector, is another important factor, going forward.
Supply chain
The supply chain inefficiencies, and speculation in agricultural commodities and food articles has already created panic, and triggered sharp price rises many times in the past. This is another major factor that can influence the inflation rate here, going forward.
RBI measures
In India, the government and the Reserve Bank of India (RBI) are taking a tough stand against inflation. The RBI has already raised the key interest rates seven times over the last 18 months. The policymakers are ready to compromise on economic growth to some extent to deal with the rising inflation rate because the implications of a high inflation rate are quite widespread, especially for the economically weaker sections.
Uncontrolled inflation is actually destructive for a country as consumers and investors change their spending habits.
These are some strategies you can adopt in the current situation of high inflation:
Stock market strategies
Inflation influences the market sentiment, and therefore in general, investors should remain cautious in the markets as the valuations are not cheap. The interest rate hikes by the RBI decrease the potential of stocks due to higher interest burden on companies, reduced aggregate demand and the increase in expected rate of returns from investments. The markets are expected to remain range-bound with a negative bias.
In addition to the general market direction, you should remain cautious on positions in interest ratesensitive sectors.
Debt market strategies
The returns from debt instruments have gone up due to interest rate hikes. Investors with a low risk appetite should look at increasing their portfolio allocation to debt instruments.
You can also look at diversification of your debt portfolio by investing in instruments such as gold and silver which have a better outlook for the short to medium terms.
Loan portfolio
The environment has turned quite bad for borrowers. Many rate hikes by the RBI have resulted in loans getting expensive across all categories. Those with a large loan are facing the heat of higher EMIs.
Since the high interest rates are going to stay for some time, it is advisable to look for alternatives to augment income, or reduce the loan burden through partial prepayments.
