In September 2022, India’s annual inflation rate rose from 7% in August to a five-month high of 7.41%. The CPI figure has now exceeded the Reserve Bank of India’s (RBI) maximum tolerance level of 6% for nine consecutive months. To counter inflation, the Monetary Policy Committee (MPC) hiked the repo rate by 50 basis points (bps) to 5.90 per cent on September 30. The MPC has increased the key rate by 190 basis points so far this fiscal year, but nevertheless, retail inflation has continued to rise over the RBI’s upper tolerance limit. In keeping with the uptick in the repo rate, banks have begun raising the interest rates on their fixed deposit products.
However, if we look at leading private and public sector banks as an example, they are still below the inflation threshold despite the interest rate increases on fixed deposits. On the other hand, in response to rising interest rates, the government raised the interest rates on a few small savings schemes by as much as 30 basis points for the third quarter (October to December) of the current fiscal year or FY23. However, all other programmes, with the exception of the Senior Citizen Savings Scheme (SCSS) and Sukanya Samriddhi Account, offer returns that are below inflation. On the other hand, investors should exercise caution before making an investment in the equity market because it is bordered by global discontent and macroeconomic tensions. Where can investors invest in light of the present inflation environment to earn returns that outpace inflation?
Sreekanth Nadella, MD and CEO, KFintech said “With inflation hitting a five-month high investors are likely to be concerned and looking for avenues that help get better returns. National Pension Scheme (NPS), is a market-linked investment that offers returns that are known to beat inflation over the long term. It is a good investment choice as it offers better return with minimum risk involved, offers tax benefits of up to ₹2 lakh under various sections, and promises a monthly income post-retirement.”
Pawan Parakh, Director & Portfolio Manager of Renaissance Investment Managers said “Traditionally investment in Gold is considered to be a preferred option as a hedge against inflation. However, in the current scenario, that may not stand true. In fact, over the last 1-year gold has corrected by 8-9% in USD terms. This is primarily because central banks across the globe are aggressively increasing interest rates which reduce the relative value proposition of gold in comparison to debt assets. This leaves investors in a fairly tricky situation. Given the increase in deposit rates, investors can consider investing in high-rated debt assets, in the short term. In the long run, large-cap equity assets have the true potential to handsomely beat inflation, while ensuring capital preservation. This holds even more appropriate in India’s context where the NIFTY earnings growth over the next 2-3 years is expected to grow at 15-16% over the next 2-3 years.”
Nitin Rao,Head Products and Proposition, Epsilon Money Mart said “Recent inflation print spiked to 7.41%, which is also a five-month high number. Inflation has bearing on investors’ investments as it impacts the value of money over time. Equities have been one of the best-performing asset classes over the longer time horizon delivering 10-12% returns. Investors may consider equity investment for maximising their wealth and to beat inflationary pressures. The current volatility in the equity markets can be considered as a good entry point from a long-term investment perspective.”
Inflation beating returns is not a challenging feat if a well-diversified portfolio of equities, gold, real estate, short-term bonds, commodities, or any other asset classes has been maintained. But the greatest potential is to get advice from your financial consultants.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.