STOCK MARKET BSE NSE

Why inflation threat looms in 2021

Inflation matters to your savings as the trend determines the direction of interest rates. Currently, the rates are low

Published: 21st December 2020 09:03 AM  |   Last Updated: 21st December 2020 09:03 AM   |  A+A-

Retail inflation, shopping

For representational purpose. (File Photo)

Express News Service

With time, inflation eats into your money. This column has previously warned about guarding your savings against an inflation demon. In the New Year, you may want to be concerned about it. “Elevated inflation has checked in and may be here to stay,” summed up Michael Patra, deputy governor of the Reserve Bank of India during the monetary policy committee held earlier in this month.

The RBI last week released the minutes of the meeting, and the word ‘inflation’ made 106 appearances. All the members of the committee that sets key borrowing rates flagged the threat of rising prices of goods and services. RBI governor Shaktikanta Das said in his comments during the credit policy meeting that a combination of ‘cost-push’ factors kept inflation high.

amit bandre

That included supply-side disruptions, a sharp increase in international commodity prices, high retail margins and raised taxes on petroleum products by both the Centre and States. “The October 2020 consumer price inflation (CPI) surprised on the upside, both in terms of the extent and depth of price pressures,” he said. The committee left repo rates unchanged at 4%. That is the rate at which RBI lends to banks. It sets the benchmark for interest rates bank charge to borrowers.

Banks price their loans to borrowers like businesses and individuals higher than the benchmark rate. There are several reasons why inflation should bother you in the next 12 months. It is likely to be on a firm trend and can influence returns on your investments. During the pandemic, large companies have done better than small companies as they had the cushion of a stronger balance sheet.

A lot of small companies have struggled to stay in business, and more significant firms have consolidated their market share. “It can be argued that large firms benefited in part, at the cost of smaller/unorganised firms,” said a report by HSBC, a global bank. “There has been a case of demand moving from small firms to large ones.

Small firms tend to be vendors of large firms and delays in payment or non-payment of bills can hurt,” the report adds.The argument here is that if small firms do poorly, it  impacts a large section of the people. That kind of a skewed performance leads to demand for more services stoking services inflation. HSBC observes that India’s consumption patterns show that the rich in India tend to consume more benefits than the poor.

Also, those selling these services would want to reset prices in 2021 as they could not do so in 2020. The securities arm of Nomura, a Japanese bank, said that the consumer price inflation would remain 1% over RBI’s target of 4% in most of 2021. As a result, most analysts expect the RBI monetary policy committee to hold on to repo rates at current levels. Nobody expects any further cuts in rates. 

What it means to you Inflation matters to your savings as the trend determines the direction of interest rates. Your savings and deposits earn an interest. However, your deposits are not going to make a higher rate immediately. Presently, they are at the bottom as the RBI is committed to an ‘accommodative’ monetary policy stance. In such a situation, interest rates are kept low in the economy to boost credit growth and stimulate the economy.

Rising prices will expand your monthly budget in 2021. If you are in a job, you may want to continue with your 2020 strategy of conserving cash, spending less and investing more. In the year ahead, your expenses are set to rise. Producers of goods and services are likely to hike prices across the board as they see an increase in the demand.

You will have to provide for these higher costs by getting a job if you do not have one. If you are already working, you may expect your average salary to be restored sooner than later. Those who did not have any disruption in pay would want to get a raise to cover for any potential rise in inflation. If you are regular with your systematic investing in equity assets, you should continue with that to benefit from any incremental profits businesses generate.

(The author is editor-in-chief at www.moneyminute.in)

5% Inflation to remain sticky and 1% above RBI’s target in most of 2021, according to Nomura 
106 That’s the total number of times the word ‘inflation’ appeared in RBI minutes

Why price instability should bother you?

There are several reasons why inflation should bother you in the next 12 months. It is likely to be on a firm trend and can influence returns on your investments.

Rising prices will expand your monthly budget in 2021. If you are in a job, you may want to continue with your 2020 strategy of conserving cash, spending less and investing more.



Comments

Disclaimer : We respect your thoughts and views! But we need to be judicious while moderating your comments. All the comments will be moderated by the newindianexpress.com editorial. Abstain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks. Try to avoid outside hyperlinks inside the comment. Help us delete comments that do not follow these guidelines.

The views expressed in comments published on newindianexpress.com are those of the comment writers alone. They do not represent the views or opinions of newindianexpress.com or its staff, nor do they represent the views or opinions of The New Indian Express Group, or any entity of, or affiliated with, The New Indian Express Group. newindianexpress.com reserves the right to take any or all comments down at any time.

edexworks
flipboard facebook twitter whatsapp