INFLATION RATE SPIKES UP TO 6.93%
Inflation rate is the percentage change from the current value of the product with the previous year. The Ministry of Statistics and Implementation has stated the report on inflation to be hiking up to 6.93% in July 2020.
Inflation is good to the economy. As the value of purchase increases government is going to benefit. In return, there will be a cash flow in the nation.
There is a standard level of inflation which people can manage, 6.93% is too high. The inflation rate was at 7.22% in April and came back to 6.23 in June.
Again it claimed back to 6.93%. Our RBI Governor stated in the last press meet on the inflation will come down to 6%.
INFLATION RATE AND REPO RATE:
There is a relationship between inflation rate and the repo, reverse repo rate.
Whenever the inflation rate increases, the repo rate has to be increased to give some value addition to investors on bank FD or RD.
Currently, the Repo rate is still maintained unchanged at 4%, so the FD rate of banks are only 5-5%. In which 10% will be for TDS. So, the actual return will be 4.5-5% per annum.
So, people who save in RD and FD, and other fixed-interest components have to face a loss of almost 2% due to the inflation rate.
As the total the nation is under lockdown and levying on EMI moratorium, RBI couldn’t increase the repo rate. This makes the economy under a state of stagflation.
This ultimately, doesn’t create any demand in the market and leads to degrowth of GDP and an increase in Inflation.
HOW INFLATION RATE INCREASES:
The inflation rate is directly proportional to the rupee notes printed against the gold. As government prints rupee to pump out liquidation in the market. The inflation rate increases.
As inflation rate increases, gold price have increased in more than 60% in the last 6 months.
The total global market is pumping the money by printing to stimulate the cash flow in people to increase the demand. This is not a step to revive the economy.
This is meant to be a century-one crisis, so printing money will create demand in the market and once the crisis vanishes off, the economy will move to good shape.
RBI governor in his May month press meet has confirmed that the GDP growth for the FY 2020-21 will be negative. In Jan 2020 it was at 3.1%. Source: Tradingeconomics.com
In one or another way, this situation is going to hurt people.
1. With the same repo rate, it will lead to stagflation.
2. If the repo rate increases, No new loans will be purchased and will lead the finance sector in big trouble.
So, Government of India and RBI will take the necessary in reviving back the current situation.
WHAT WILL HAPPEN IF THE SITUATION STILL CONTINUES?
As I have mentioned earlier. This is will lead absolutely to stagflation, as investors will not invest in any fixed income instruments. As the share market is not in the good shape of profiting for the next 3 years.
Investments will become down, as in the month of July 23% of the funds have redeemed from equity mutual funds.
What is stagflation?
In simple term, high inflation rate with the combination of high unemployment and no demand in the market is known as stagflation.
RBI governor has to take any of the offending steps to bring demand in people’s pockets. Either by increasing the repo rate or by decreasing the inflation by cutting down the printing of excess cash.
LESSON FOR INVESTORS:
In these states of many “flations” occurring at the same time, it is your duty to save the capital first.
There are many young people have entered the trading world to make a monthly income as they became unemployed. More than increasing wealth, it’s time to preserve them.
Till repo rate increases, stay out of RD and FD’s. Even PPF, EPF, SSY, and other government-related schemes have cut down their interest rate in a huge way.
Whatever the situation, make sure you are with emergency funds for a minimum of 6-12 months.
Stay out of equity market until the market increases its earnings or corrects itself. Till then park in the high-quality bonds holding debt funds. But be aware of the interest rate risk involved.