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Inflation worries: As repo rates go up, review your finances

While addressing shareholders recently, Warren Buffett, the 91-year old CEO of Berkshire Hathaway, gave a solution to beat inflation.

Published: 09th May 2022 09:22 AM  |   Last Updated: 09th May 2022 09:22 AM   |  A+A-

Representational Image. (Express Illustrations | Sourav Roy)

Express News Service

While addressing shareholders recently, Warren Buffett, the 91-year old CEO of Berkshire Hathaway, gave a solution to beat inflation. The sage of Omaha said that individuals should excel in what they do to negate the impact of inflation. At first glance, you may think it is an obvious fact of the matter statement.

However, Buffett emphasises that you need to use your skills to get more work during inflationary times. He said that no amount of inflation could take any slice away from things you know. Doubling your effort in something you do well can only be more remunerative. 

That makes sense as your finances could face a tricky situation over the next few quarters. You may want to focus on giving your income a bump as your monthly expenditure increases due to rising inflation and interest rates. You are all set to pay more for essentials and your loans.

The Reserve Bank of India’s monetary policy committee had an unscheduled meeting last week and unanimously voted to hike the repo rate or the benchmark borrowing rate by 0.40%. The RBI also increased the cash reserve ratio, or CRR, by 0.5%. Banks have to maintain CRR deposits with RBI against deposits. These measures would make loans expensive, and your Equated Monthly Instalments (EMIs) on all loans will go up. 

The way to tackle a situation when money is squeezed out is to shore up your income. Buffett is spot on that. He argues that any monetary event cannot undercut your skills. If you do something better, you will continue to get more money from things you do well. A doctor or an accountant would continue to use their skills without getting affected by inflation.

Similarly, you may want to put in that extra effort to further enhance your income’s potential. High inflation and high-interest rates may undercut your long-term savings and investment plan if you have a steady income through a salary. Your long-term financial goals may not get the necessary support from your savings in such a situation. 

The situation is also an excellent time to step back and review your finances. When interest rates rise, you need to cut back on your expenditure first. At the same time, you need to pay off credit cards or personal loans. These are the most expensive loans, and they get more expensive as rates rise. You must utilise any surplus you get in your hands to pay off expensive loans. There is no need to rush to repay your home loan. It would get costly, but it is the cheapest loan. 

Your fixed deposit rates would rise. While that is good news for wealth protection, it may not necessarily contribute to your wealth creation in the future. If you add more savings to your fixed deposits, you are barely covering for inflation. Your investments need to generate at least twice the rate of return as consumer price inflation. When interest rates are rising, equity markets turn volatile and trend down. However, that is not the time for any panic. Stock markets and interest rates move in cycles. 

Equity assets have witnessed a significant run since the bottom of May 2020. When share prices rally, valuations go past the fundamentals of those businesses. An increase in the borrowing cost of money is expected to cool off such high prices. If you are a direct investor in the stock market, you may want to choose businesses that show consistent profits and do not need to borrow more for future expansion.

Over the past few years, large companies in manufacturing sectors have repaid loans. Their balance sheets are healthier, and that is helping banks to do better too. An important step would be to talk to a professional advisor and create an asset allocation plan. If you are getting squeezed due to rising interest rates and inflation, you have to work towards enhancing your income. If you already have a steady income, you need to wisely put your money at work. A conversation with an advisor should help you keep calm.  

0.40% The RBI’s monetary policy committee had an unscheduled meeting last week and unanimously voted to hike the repo rate or the benchmark borrowing rate by 0.40%

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



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