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All you need to know about inflation

Posted on 24 May 2021,    
 5391    Share  Report

Content : Why is inflation so high?
The immediate cause for the big jump is the recent hike in petroleum products prices. But inflation has been building for some time due to the increase in food, steel and cement prices, among other things. The big increase in money supply due to external inflows last year was another contributory cause.

When will it ease?
Not anytime soon. Prices will start easing only if there is a sudden crash in global oil prices, or there is a bumper harvest. "Food prices tend to go up very fast, but can go down quickly if the agricultural produce is good," says Siddhartha Sanyal, chief economist, Edelweiss Capital

What happens to interest rates now?
As inflation goes up, interest rates should go up as well. Currently, one-year interest rates are around 8% and inflation is at 11%. This means you earn a negative interest rate of -3% when your money is adjusted for inflation. This anomaly will have to be corrected over time.

Will FD rates rise?
Fixed deposit rates depend on whether banks need more money to lend, and not on the inflation rate. Also, banks to tend offer higher deposit rates for specific maturities depending on their need to balance liabilities. Currently the highest one-year FD rate is around 9.5%. 10% is a distinct possibility.

What will happen to stocks now?
Stock markets and interest rates are inversely correlated. When rates are high, market prices tend to weaken. Also, when inflation is high, companies try to pass on higher costs to customers, which may weaken demand and margins. This may make stocks less attractive in the next few quarters at least.

Where should I invest now?
The best bet is to stick to an asset allocation. Exposure to equity should be roughly 100 minus your age. At age 40, you should be putting 60% in equity and 40% in debt, including FDs. Lokesh Nathany of Almondz PMS advises against putting too much money in FDs due to negative real returns.

Will companies play Scrooge on salaries?
Companies will continue to pay performers well. Monisha Advani, managing director of HR consultancy Ranstad India, says a recent round-table of clients was unanimous that reward structures won't be altered by the inflationary environment. "Good talent will continue to command a premium."
—Contributed by Khyati Dharamsi



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