Inflation is one of the most important economic elements that determines a country’s costs and affordability. It has the ability to both increase demand during a recession/economic slowdown and devalue millions of people’s wealth at the same time. It has suddenly become a buzz term in the economy during the last couple of years, as the price of everyday commodities in India has begun to rise.

Looking at the facts, India’s average inflation rate has remained at 6.22 percent for the previous 20 years, according to World Bank data. Let us provide an example to make it even easier for the typical reader. In 2020, something that cost Rs 100 in 2000 would cost Rs 334. Since the last 20 years, the price has more than doubled, or in other words, the purchase power of a Rs 100 note has plummeted.

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But why does this happen in the first place? Some economists argue that in a well managed economy prices of goods and services should actually go down over a longer period as humans find ways to scale production as per an article by IMF. Instead, what we’re facing is an ever increasing bubble of debt since 1971.

Fiat money as we have today is backed by people’s trust. It’s a simple debt instrument where money is created each time a loan is taken out from the banks because of Fractional Reserve Banking.

Side Effects of High Inflation

Just the day of writing this article, Wholesale Inflation in India as of March 2022 is 14.55%. With such a high level of inflation, there is bound to be certain consequences around the economy.

  • People are less likely to save money. When prices rise by double digits and savings accounts pay a meagre 3% annual return, individuals begin spending as quickly as possible. Demand for things rises as a result of this excessive spending, pushing prices further higher and putting a strain on the poorest members of society who have very little disposable money.
  • People amass goods in their homes. Higher inflation means that your money will be able to buy fewer and fewer products in the future. People lose faith in the sovereign currency and turn to alternative forms of payment such as the US dollar, gold, or Bitcoin. Consider Venezuela, Lebanon, Argentina, and Turkey.
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  • Asset prices shoot up. As the purchasing power of a currency falls, people look at investing in assets that beat Inflation. Historically, Gold has a proven track record against hedging Inflation. Alternate assets like Silver, Bitcoin, Real Estate for example become more expensive domestically.
  • People start taking more & more debt. As the income gradually fails to sustain the lifestyle of people, they start borrowing money eventually increasing the debt in society. Debt can cripple down financial wellbeing of people if not managed. Taking Debt to spend in day to day items instead of buying assets severely impacts borrowers leading to more NPAs for banks.

Historical Inflation in India

Fixed Deposits are the most popular form of savings in India, at least according to our parents. Fixed Deposits used to offer inflation-beating rates of 8-10 percent a year, which seemed like a no-brainer at the time. After factoring for Inflation and tax, the interest rate is now negative.

What this means for our age-group is that while Fixed Deposits can protect money in the short term, they can no longer be used to build wealth.

RBI tries to keep Inflation within a band of 4 (-2 or +2)%. For the last three quarters, the upper band of Inflation has been breached consecutively. How does this affect the economically weaker sections of our society?

For starters, the purchasing power will keep on going down and savers will be losers. Lesser Disposable income leads to lesser wants and less consumption outside of basic needs. People who are already struggling financially may end up getting more into debt to make their ends meet. Day to day prices will keep on rising because brands have suddenly discovered a new excuse of Inflation.

Will the Situation Improve?

The monetary policy of RBI can be tricky to understand & it carries a significant impact to the Financial Markets. So far it has been leaving clues on raising Interest Rates and shift its stance of monetary policy. Some people have already picked up the hints dropped by RBI so far.

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If you go by the latest policy announcement and subsequent remarks by the RBI Governor, “the Monetary Policy Committee is finally past the extreme accommodative stance”. What does that even mean for us?

An “Accommodative Stance” means that the RBI is looking forward to increasing the money supply in the economy. This is done by purchasing Government Bonds and Corporate Bonds & lowering the Repo Rates. A “neutral stance” suggests that the RBI is neither looking to cut rates or increase them. A “hawkish stance” indicates that the Central bank’s top priority at the moment is keeping inflation low irrespective of growth in the economy.

One of the top reasons why RBI might change its stance from Accommodative towards Hawkish is because of higher Inflation over the last 3 quarters consecutively. Central banks increase the cost of borrowing money to bring down the inflation. Increase in Repo Rates mean banks won’t lend easily to businesses and consumers which in turn will reduce the consumption and slower the economic engine.

What to do Meanwhile?

Indians are savers. We all prefer to save some money every month before spending it all & the most favourable place so far to park that extra cash every month was Fixed Deposits. Firstly, we need to ditch that idea altogether. Keeping aside the 12 month emergency fund in a Fixed Deposit, not a penny extra should lay there.

  • Equity Mutual funds (Large Cap & Mid Cap) can be a great way to start the Investing journey. Beyond stocks, retail investors can now participate & invest into Senior Secured Bonds using platforms like WintWealth (Not Sponsored).
  • Crypto is another sector to look for especially now if you want to hedge Fiat Currency. There can be multiple reasons to get exposure into Bitcoin or Ethereum. Mostly it’s because Governments can’t print more of Bitcoins into the circulation.
  • Metals like Gold or Silver have been there for centuries. Keep stacking them.

If you’re tight on budget without much room to play around all these options, try to invest more into your skillset. It is the highest paying asset over a long-term.

We’ve many articles on our website related to Cryptocurrency Investing. Find them here.

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Educating people about Blockchain over Zoom and offline events. Writing blogs related to crypto and making videos explaining it.