What is ‘stagflation’ and how does it affect your money
When borrowing rates are set, there are two concerns monetary policy committees (MPC) have about the economy. The first one is about the inflation outlook, and the second is about the future of economic growth.
The Reserve Bank of India’s MPC kept key borrowing rates unchanged last week. The committee maintained an ‘accommodative stance to support economic growth. But they decided not to buy more government securities and release money into the financial system. The monetary policy statement also mentioned absorbing more money from the system by December 2021 through a variable reverse repo rate market operation. That is expected to reduce the money supply and help curb inflation.
The RBI committee maintains that the stubbornly high inflation rates in the economy were primarily driven by ‘supply’ shocks and were transitory. In the same breath, the committee noted that although the outlook for aggregate demand was improving, it was still weak, and there was a large amount of slack in the economy, with output below pre-pandemic levels.
The two things hint at a phenomenon called ‘Stagflation ‘- rising inflation and slow or stagnant economic growth. The growth outlook of the RBI committee described the spurt in the economic activity as ‘nascent and hesitant recovery’ that needed to be nurtured.
There is clear evidence of rising inflation all over the world. Since the pandemic, food prices worldwide rose 40%, according to the International Monetary Fund, a global body. In India, the consumer price inflation averaged 5.5% between April to August 2021, much higher than the 4% inflation target set by the RBI. For many households in India, food consumption accounts for a significant share in expenditure. That has averaged lower. But non-food inflation due to the highest prices of commodities like oil, metals and edible oils in ten years is bad news. It means producers would pass on rising costs to consumers.
“We expect producers to pass through rising costs of production as domestic demand recovers in the second half of this fiscal,” said CRISIL comment on the RBI policy. Countries like Brazil, Mexico, Turkey, Chile, New Zealand, Korea have all increased interest rates as inflation hovers over the target.
The fragile nature of economic growth means that India would have to hold back raising borrowing rates to deal with inflation. For the moment, RBI would have to use other measures to remove the excess money in the banking system to check inflation.
What it means to your money
Since the RBI and the government are keen to boost economic growth, you may allocate your savings towards equity assets. Sectors like metals and infrastructure are likely to see a significant investment from businesses and governments if one goes by the commentary of stock market analysts.
Expectations of solid profit growth over the next two years are driving investors to buy Indian shares. You can continue to invest if you are an experienced investor regularly. A better way to allocate your priceless savings is to use systematic investing in multi-asset funds. Your National Pension Scheme or NPS can generate market-linked returns.
You must use fixed deposits or other guaranteed return instruments only if you want to protect your capital. However, if you are young and confident about your ability to generate a steady income, you must regularly invest in equity assets.
However, share prices are at a record high too. A lot of you who are young are curious about bitcoin and other crypto-assets. So much so that the value of crypto assets surpassed $2 trillion in September 2021 worldwide, according to the IMF estimates.
If you convert your rupee savings into crypto assets for want of returns, you will buy an asset whose value could rise. However, since RBI does not have any control over crypto assets, the monetary policy that governs the money supply (rupee) will not curb inflation. All of that creates uncertainty like never before.
Inflation around the world
Since the Covid-19 pandemic, food prices across the globe have risen 40%, according to the International Monetary Fund, a global body.
(The author is editor-in-chief at www.moneyminute.in)