In general, inflation means increasing the price of goods and services over a period. Here goods and services stand for the baskets of commodities and services which are of daily usage or commonly used in day-to-day life. Provided the rate of interest on our saving is not at par with the inflation rate in India then our purchasing capacity declines.
What is Inflation Rate in India?
Let says onions were 10 Rs./kg last year and this year the price of onion rose to 22 Rs./kg wherein the money in our saving account was fetching 2.5% return every year. if we see the rate of inflation is 12% in comparison to purchasing power which got increased by only 2.5 %. So now consumers must cut down on the consumption quantity as we are not having enough money to buy the same quantity.
So, as we have understood the concept of inflation is indirectly related to our purchasing capacity it’s directly indicative of the cost of living in a country. Hence in the case rate of inflation so does the cost of living which deaccelerates our rate of purchasing power.
From the perspective of saving and investment in case, one is not saving enough or not investing in an appropriate financial instrument that matches the rate of inflation then one will not be able to achieve the goals or dreams he has set for himself.
Current Inflation Rate in India
For the second month in a row, the inflation rate stands above 7% which is over and above the RBI target of 4% so looks like RBI will going to announce another cut in the interest rate.
If we look at the data for the last 10 years, we can see on average inflation has increased by 7.32% but the annual change for the last 10 years is still negative.
India Inflation Rate – Historical Data
|Year||Inflation Rate||Annual Change|
So, if we consider the average inflation rate in India and take an example of a person who was aged 50 years in the year 2010 and planning for retirement in 2020 will be able to amass enough for his retirement kitty.
In case this person was not saving enough amount or not putting his hard-earned money in instruments that give a higher return than the current inflation rate then inflation will going to shrink his saving and if gods forbid he diagnosis with any ailment then this saving will not go to save him for the medical cost and other daily need requirements.
How Impacts Your Savings
The key to beating inflation is to stay invested in long-term financial instruments which give better returns. But one needs to choose an investment option as per their risk tolerance and appetite that is more to do with your age.
Before investing in any financial options always relate its lock-in period and returns with your goal, if your goal is in line with the returns rate, lock-in period, and meets your risk tolerance then only you can afford to invest in that avenue.
Inflation is a market force one cannot completely avoid the same during their life journey. Typically, when the economy of the country is strong inflations tend to be high as companies sell more due to the high demand for their goods/services resulting in rising in market share. Considering this fact, one should not put all their money in saving bank accounts or bonds as these instruments are quite safe in terms of returns but hardly able to beat the inflation rate in long run.
The Bottom Line
So to beat inflation and hedge your portfolio against rising inflation you should your money in different financial instruments like stocks, bonds, mutual funds, gold, ppf, fixed deposits depending upon your investment horizon, age, and type of goal you are aiming for to achieve. This way you can mitigate the risk of inflation on your saving and investment.