Gloomy and more uncertain, says the latest update from the International Monetary Fund (IMF), a multilateral agency on prospects for the world economy. The world’s biggest economies face unprecedented challenges. Surging inflation and economic slowdown are putting uncertainty at the centre of everything. Financial markets can deal with volatility. However, it is hard to move forward when things get uncertain. That applies to bonds, equity and currency markets alike.
It is a cycle of negative news flow that could take the shine off your savings and investments. Interest rates continue to move up as that is a significant weapon against inflation. Your investments have no meaning in a high inflation scenario.
For example, the annual consumer price inflation rate in Sri Lanka is over 60%. To tame that, the government in Sri Lanka not only has to raise interest rates it has to enforce austerity measures on an unprecedented level to curb demand for goods and services. That puts people into hardship. At the same time, they can survive that if it is for a few weeks or months. However, the longer it lasts, it could trigger further civil unrest.
The inflation beast is in India’s neighbourhood. Pakistan is another country where the economy is on the brink. That is causing a lot of hardship to the people. For example, Pakistan does not have a domestic tea manufacturing capability. It imports over $600m worth of tea from countries like Sri Lanka. A minister in that country was quoted as urging the Pakistani people to consume less tea.
How vulnerable is India
Last week, former RBI governor Raghuram Rajan said that India was not facing a situation similar to Pakistan and Sri Lanka thanks to the efficient management of foreign exchange reserves by the Reserve Bank of India. A key indicator is a money India owes to foreigners. The headline number of the current account deficit indicates that it has narrowed steadily in the quarter to March 2022. According to the RBI data, India has enough money to pay for 11 months of imports. Also, India does not owe too much foreign exchange to other nations. The short-term debt repayment is bringing many economies down. India’s short-term liabilities are manageable. Besides that, India’s merchandise exports rose, and foreign remittances to India remained strong, according to a speech by Michael D Patra, deputy governor of the RBI, last month.
What it means to your money
Your fixed deposits would enjoy a higher interest rate. However, if inflation remains elevated, that makes no difference to the actual returns you get on your savings. They remain low. For creating wealth, the ability to save money is just a stepping stone. You need to invest regularly to beat inflation over the long term. Equity assets are the only asset class that can help you consistently beat inflation. You need patience and the ability to hold on to your investments.
Equity returns are linked to profits generated by major listed companies. You directly or indirectly invest in these businesses. Rising inflation and interest rates put pressure on corporate profits. If money costs get too high, businesses tend to slow down investments and spending. That further hurts job creation and stalls economic activity. The latest quarterly conference call transcript of Hindustan Unilever, the biggest consumer company, mentions inflation 65 times. The company management has warned of future profit margin pressure due to high input prices. Similarly, TCS, the biggest software services exporter, told investors that the technology spending by companies in the US and Europe would be resilient despite the geo-political conflict in Europe. As diverse businesses navigate a strategy
out of challenging situations, you need to focus on your priorities.
If you have financial commitments in the short term, you should not invest in equity assets. There is no point in blaming equity markets if you suffer losses. Your money needs you to take a rational approach. Put aside the amount you do not need now. If you have a good understanding of finance, you may want to put it in equity assets directly and indirectly regularly. You are better off index investing if you are not a ‘finance’ person.
(The author is editor-in-chief at www.moneyminute.in)