Inflation in all major developing countries has been running high since last 15 months. India has seen a major casualty when it comes to inflation. Indian government has taken actions to curb inflation by asking RBI to raise interest rates. In the second half of last year the inflation rates was getting moderate at 8% hence the interest were bought down. But again the food prices soared sky high limits beginning 2011. Common public is more effected when prices of essential commodities like sugar, pulses, vegetables are hiked. With price of petrol getting deregulated and India seeing two price rise in petrol in last one month (Rs 5/month), there is no respite for common masses from inflation.

Inflation of total basket of food items touched in one year high this month and this virus of price rise is sure to effect the whole sale price index (WPI). Inflation rates will see further high in case WPI gets effected. Inflation is based on WPI and the present trend is showing WPI in red. Manmohan Singh government may have done almost everything right for the India investors except for inflation.

Let us see how a high inflation rates effect us in long and short term:

We are sure to see tough interest rates in future

Interest rates have already gone up since last few months as measure to control inflation. But it looks too easy for government to play with interest rates. When news channels flash those high interest rates in bold, our government causally makes a statement that they are taking actions to bring inflation down. But we are not sure if they are doing anything more than just control few interest rates numbers on their main frame computers. Because if they must have been doing something concrete in last one year we would not have seen news flooded only with inflation trends.

For you and me higher interest rates means higher EMI’s of home loans and personal loans.

Though stock market is not directly related with inflation but indirectly there is a big impact

With news of high inflation eroding the investors funds back door, the sentiments of retail investors are badly hurt. Technically speaking with high inflation the interest rates on debts goes up, it means borrowing of money gets costlier. It directly effects the pricing of products in the market, there by reducing the profit margins. There are companies which are very capital intensive and any change if interest rates immediately effects their profit margins.

Essential & General Commodity prices increases with inflation

The price of commodities goes up faster with high inflation rates. The pinch of price rise is felt most by common public when commodity becomes costlier. In recent times (because of several contributing factors) the inflation of vegetables and other food articles have been hovering around 20% mark, which is surprising and worrisome.

Strategies to cope inflation

Inflation in a growing economy (second fastest growing economy is India) is very difficult to control. Controlling inflation is not a one day process, instead it takes time for steps taken by RBI to become effective and lower inflation rates. The hard part of inflation is that it effects the worst those lying below the poverty line. In India there is a huge population of citizens living below poverty line. Indian middle class has been successful to create a good cushion of savings that can absorb the impact of inflation on their standard of living. But poor and daily wage owners lives like hand to mouth. Such high inflation rates are like a curse to their livelihood. Government must take this point that ultimately a major part of GDP growth is driven by in house spending habits of the population. High inflation rates for a long time hurts the sentiments of consumer and they in turn reduce their spending’s. This will drastically lower the GDP. So what strategies a common investor can adapt to fight inflation.

Share Market Investors shall do this:

Share market value investors, high inflation rates and negative sentiments smells good for you? Yes I know often retail investors becomes negative and start selling. Any how the current share valuation are very high. So wait and let this negative sentiments take its toll. Once the selling starts enter the market buy some good companies. For investors who would rather not like to wait should be staying away from at least interest rate sensitive companies like banking, metals etc.

Investors who are investing to protect their capital (debt linked plans) shall do this:

Unfortunately high interest rates means bad and ugly for all debt linked instrument schemes. I will suggest all debt linked investors should not panic and should adapt wait and watch strategy. Better will be to create a portfolio with more of precious metals (…gold investment advice). Like gold and silver.

If it is a right time to apply for home loans?

No this is bad time to get a home loan. The current trend of high inflation is surely going to hit interest rates. For sure home loans (EMI’s) are going to ge costlier. Instead I will suggest investors to think of alternative investment options instead of real estate

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