How to handle the inflation monster in India?

Updated: Thursday, August 14, 2014, 11:42 [IST]

Inflation in India has always been notorious. In a country like the US, inflation remains under 2 per cent, while in India a few months ago consumer price inflation was in double digits above 10 per cent.

For all the excuses the government gives on rising crude prices, poor-supply chain in the agricultural sector and so on on and so forth, the simple fact remains that inflation fast eats into our savings.

Here's an example...

Today, interest in a decent bank deposit fetches an interest rate of 9 per cent, while until recently retail inflation was above 9 per cent. Let's say for an example, we place it at 10 per cent per annum.

What this means is that the value of Rs 100 in a fixed deposit would be Rs 109 (9 per cent interest), while inflation at 10 per cent, means you need to be earning Rs 110 after one year and not Rs 109 from a fixed deposit.

In financial terms what you have got is a real rate of return, which is negative. What this means that inflation has risen faster and eaten into the income from your interest rate and a little from your principle amount.

What is the solution?

The one and only one solution is to look for higher returns and here is now.

Diversify into company deposits

For example, diversify from bank deposits to company deposits. But, be careful company deposits are not secured deposits, therefore invest in strong company deposits. For example, you can earn as high as 10.5 per cent in a government backed company deposits of Kerala Road Transport Finance Corporation. Take a look at good company deposits here

Look at non convertible debentures

Chase higher returns through non convertible debentures (NCDs). Listed NCDs can offer you returns in the range of 11-14 per cent. To read more on how to buy NCDs click here

Diversify into equities

It's difficult to say whether this would be the right time to invest in Indian equities, since they have become horribly expensive at the moment. If there is an opportunity to buy at lower levels, you can enter into good quality stocks, so as to help beat inflation.

Real estate and gold are other options

Investing in real estate and gold are other options, but, real estate is more a long-term bet, while gold has gone nowhere in the last one year.

Conclusion

Clearly, if you want better returns by beating inflation, you would have to increase your risks, by investing in instruments where there is no guarantee of returns that are certain like gold, real estate and equities. But, that is the only option, given that interest rate on secure bank deposits are not beating inflation at the moment.

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