- Date : 09/06/2022
- Read: 3 mins
As RBI predicts a high inflation rate for the current FY, how you cope with it as an investor and as a consumer will need some thinking, like household spends monitoring and portfolio reassessment.
The Reserve Bank of India Governor Mr Shaktikanta Das has forecasted that retail inflation in India will be around 6.7% in the current financial year. This is a percentage increase from the inflation forecast made earlier. The governor commented that an increase in the inflation rate is being observed in all major categories. The Monetary Policy Committee has also unanimously agreed to raise the repo rate to 4.9%, an increase of 50 basis points. An inflation rate in India of over 6% for three consecutive quarters forces the RBI to explain the causes to the government and suggest remedial measures. As this is likely to happen, the RBI can no longer remain accommodative in its policies.
What does an inflation forecast of 6.7% mean to investors?
Inflation has a direct effect on investments and returns. The primary aim of an investor is to ensure an increase in returns from the investments made. Inflation reduces this return. When you invest in a fixed deposit, let’s assume that you earn an interest of 5.7%. This is the nominal return. The real return is the nominal return after deducting the inflation. If the inflation stays at 6.7%, as predicted by the honourable governor, your FD investment is losing money rather than generating any real return.
Investors must look to beat inflation at the very least and aim for high real returns as a means of doing so. In times of high inflation, investors should look beyond nominal returns and reassess their portfolios. Precious metals like gold have a reputation, albeit debatable, of being an inflation hedge. Investors can invest in gold and silver exchange-traded funds as an alternate means of investment. Real estate investments are another option, as property rates generally increase with inflation. Direct investment in the stock market can beat the inflation rate as well. Investments need to be made in sectors which are less capital-intensive and are less affected by inflation.
Also Read: Should You Resort To Gold During Inflation?
What does an inflation forecast of 6.7% mean to consumers?
The impact of the inflation rate latest news of a hike is quite ominous for consumers. Their money continues to lose purchasing power, which in turn erodes their saving propensity and expenditure patterns. As the wholesale price index rises due to the global rise in fuel, metal and chemical prices, suppliers are forced to pass on the price hike to the customers. Consumers end up spending more on the same items, which in turn leads to financial disarray. Therefore, high inflation is a reminder for consumers that their budgets need to be revisited. Steps like cutdown of expenses or reduction in savings may be required, or both in worse cases.
Geopolitical tension and pressures on the supply side have given a global scale to the current inflationary trend. Meanwhile, in India, the RBI is committed to keeping the inflation rate within the 2-6% limit. It can do so by regulating the money supply, adjusting bank and repo rates, buying dollars and so on. Therefore, strong remedial measures can be expected in the days to come, some of which have already been put into motion.