Take adequate, long-term exposure to equities to counter inflation

In the short term, take on part-time work and postpone discretionary expenses to cope with this round of price rise which may not end in a hurry

The current round of inflation has hit Madhu Singh, 42, an Indirapuram-based housewife, hard. “Earlier, a Rs 500 note used to suffice for my morning shopping of fruits, vegetables and a few other items. Now it doesn’t,” she says. Her lawyer husband’s earnings, too, have taken a hit amid the pandemic. With inflation gnawing away at their purchasing power, many people who live on limited budgets worry about their ability to maintain their current lifestyle.   

Broad-based, persistent inflation

At 6.3 per cent, the May number for consumer price index (CPI)-based inflation came in as a shock. “There was a supply shock. Fuel prices are up. Vegetable prices anyway tend to rise during the summer months. Services inflation surged. Some data discrepancy due to the lockdowns may also have contributed to the high print,” says Madhavi Arora, lead economist, Emkay Global Financial Services.

The Reserve Bank of India (RBI) has referred to the current bout of inflation as transitory, but economists say inflation may not come under control quickly even if economic activity gets back on track and supply disruptions are tackled. “There seems to be a resilient element to this bout of inflation which is a cause for worry,” says Abheek Barua, chief economist, HDFC Bank. Edible oil prices, for instance, have risen in the international markets on account of the rally in commodities. High commodity prices have had an impact on the prices of manufactured items in India.

High petrol and diesel prices are the result of high crude prices internationally. The high price of oil pushes up transportation costs, which then have a cascading impact on the prices of a wide variety of goods. It is hard to predict how long the prices of crude and other commodities will remain elevated.

The demand for healthcare has shot up due to the pandemic. But since it will take time for hospitals and other healthcare facilities to expand, costs may remain on the higher side for some time.

While Arora has forecast that CPI-based inflation will average 5.45 per cent in FY22, Barua expects it to be 6 per cent.

A silver lining

Usually, high inflation is associated with rising interest rates. Not only do households have to spend more on items of daily need, they also have to worry about paying higher equated monthly instalments (EMIs). This time, however, they can afford not to worry on this count. “Despite rising inflation, the RBI is keen to keep interest rates under check. It needs to support growth and also manage the government’s borrowing programme. So, it is unlikely to raise the repo rate anytime soon,” says Barua. Home loans rates are mostly linked to the repo rate.  

Short-term options

Experts warn that households should not make the mistake of thinking this bout of inflation will go away quickly, and should be prepared for a reasonably long period of high inflation.

Those with budget constraints should look to down-trade. This means one should look out for cheaper alternatives and move to them in any category where it is possible, like edible oil, where a less expensive substitute may be available.

With a third wave of the pandemic remaining a distinct possibility, households must opt for precautionary savings. Have a budget in place and stick to it. “While it is hard to cut down on the consumption of staples, you must postpone discretionary purchases until inflation comes down or your earnings improve,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com. Recreational spending like holidaying, he adds, should also be postponed.  

Moonlighting is a good option to deal with rising costs. “Many jobs are available online. This is one way you can cope with higher expenses in the short term,” says M Pattabiraman, founder, Freefincal.com.

Longer-term solutions

To deal with high inflation, build long-term portfolios (of seven years and above) that are tilted in favour of equities. “This is one asset class that can beat inflation comfortably over the long term,” says Chetanwala.   

   

 Younger people, like those in their thirties, should draw a lesson from this episode of high inflation and take adequate exposure to equities. “Many younger peoples’ portfolios are tilted heavily in favour of fixed-income products like Employees Provident Fund (EPF), Public Provident Fund (PPF), and so on. While they may have started investing in equity mutual funds, their exposure to these instruments is still very low. This should be rectified,” says Pattabiraman. They should opt for equity exposure of 50 per cent or above based on their time horizon and risk appetite. 

Take exposure to developed world equities, like that of the US, which over the long term are likely to see lower inflation than India. Gold is known to be a good hedge against inflation, so take 5-10 per cent exposure to it.

Mistakes to avoid

At a time when fixed deposits are failing to beat inflation, many people are trying to chase higher returns by investing in financial products whose risks they don’t fully understand. “Senior citizens are investing in equities even the money they need to meet their regular expenses. Some are investing in risky debt fund categories. All this should be avoided as they could end up losing their capital,” says Pattabiraman.