As you go about with so many things in view of your life today, transacting business, tending your family’s needs, busy with career and many others, we definitely stand still once there is a threat to our security such as inflation. But what is really inflation? Inflation is a universally bad phenomenon – it is certain to affect you one way or the other. But you can do a couple of things to minimize its impact on your savings and investments.
Tips on how to minimize its impact:
- If your income hasn’t seen an increase this year, you need to save a bit more. See which expenses you can cut down on.
- Do not enter into longer duration fixed deposits or other ‘lock-in’ type products. Deposit rates are very likely to rise in the next year or so, so you might as well lock in rates then
- Do not keep too much cash lying idle in the bank account. This is always a bad thing, but it is worse with the inflation reality nibbling away at whatever is there.
- Real estate and gold are good investments during inflationary times. If these are in line with your overall financial diet, now is a good time to make the move. But beware of taking on floating rate loans, since rates may rise very soon.
Having these tips in our finger tips now, let’s understand deeper the reality of inflation:
Basically, inflation is money supply. If the government prints more money, or if the money goes around faster in the economy, there is inflation. Sometimes, not enough goods are produced (like due to the monsoon failure of 2009). So the same money ends up chasing too few goods, and there is inflation again. This last is called supply-side inflation.
The government often tries to blame most episodes of inflation to supply side, and claim that these things are beyond its control. However, the fact is that inflation is nearly always a money-supply issue.
Why does the Government print more money?
This happens when it has borrowed too much, and cannot figure out a way to pay back. So Government being what it is, gets out of the hole by printing Rupees, and making all of us poorer in the process (since our money has lost some purchasing power). Of course, the Government cannot do this recklessly, since that would put prices on an uncontrollable spiral.
Why does the money go around faster?
Money goes around faster with or without us controlling it. This brings us to interest rate, which is an important determinant of how fast money goes around. If the interest rate is low, there is more incentive to borrow and utilize the money for economic activity. Banks lend, households or businesses borrow, deploy the money and the cycle is completed faster. On the other hand, a higher interest rate discourages this entire cycle by acting as a barrier to borrow in the first place.
Moreover, the Reserve Bank of India uses this mechanism to control how fast money goes around. If inflation is rising, it raises rates and tries to apply brakes. Vice versa if inflation is low and no economic activity is to be seen. This action constitutes monetary policy.
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In conclusion, inflation does more harm than good. The most common of all this bad effects is conflict itself – any businessman would want rates to be low. He too is affected by inflation, but he is much more directly affected if its borrowing is too costly. Government is another borrower, so it too would like rates low. Most households on the other hand, are much more worried about inflation – they would like low inflation, even if it means high rates. RBI needs to proactively manage this ‘conflict’. When it fails, one side gains at the expense of the other, thus we must work hand in hand together to avoid the tendencies of having all the chances of inflation to emerge.
