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Biggest Threat

NOW you have less time to earn, for a longer survival period.

So, you NEED to START thinking at earliest about a plan to accumulate FUNDs for your non-earning years of LIFE.

What Is Inflation ?

During 1990, you could buy a milk for Rs.6 per liter, a new car for less than Rs.70,000 and an average house for around Rs.2,00,000. In the wenty-first century, milk, cars, houses and just about everything else cost more. A lot more. Clearly, we've experienced a significant amount of inflation over the last 20 years. When inflation surged to double-digit levels, financial analysts declared it public enemy No.1. Since then, public anxiety has abated along with inflation, but people remain fearful of inflation, even at the minimal levels we've seen over the past few years.

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.


As inflation rises, every rupee you own buys a smaller percentage of a good or service.

The value of a rupee does not stay constant when there is inflation. The value of a rupee is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a Re. 1 pack of gum will cost Rs.1.02 in a year. After inflation, your Rupee can't buy the same goods it could beforehand.

Problems arise when there is unanticipated inflation:

  •     Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an     interest-free loan.
  •     Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
  •     People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
  •     The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.
  •     If the inflation rate is greater than that of other countries, domestic products become less competitive.

See Slides Below to understand more

How Inflation And Interest Rates Are Related ?

Whenever you hear the latest inflation update on the news, chances are that interest rates are mentioned in the same breath.

Interest rates directly affect the credit market (loans) because higher interest rates make borrowing more costly. By changing interest rates, the govt. tries to achieve maximum employment, stable prices and a good level growth. As interest rates drop, consumer spending increases, and this in turn stimulates economic growth.

Contrary to popular belief, excessive economic growth can in fact be very detrimental. At one extreme, an economy that is growing too fast can experience hyperinflation, resulting in some problems.

At the other extreme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle. It's the govt. job to maintain that delicate balance. A tightening, or rate increase, attempts to head off future inflation. An easing, or rate decrease, aims to spur on economic growth.

Keep in mind that while inflation is a major issue, it is not the only factor informing the govt. decisions on interest rates.

Why Inflation And Investments Are Inter linked ?

When it comes to inflation, the question on many investors' minds is:

"How will it affect your investments?" This is an especially important issue for people living on a fixed income, such as retirees.

The impact of inflation on your portfolio depends on the type of securities you hold. If you invest only in stocks, worrying about inflation shouldn't keep you up at night. Over the long run, a company's revenue and earnings should increase at the same pace as inflation. The exception to this is stagflation. The combination of a bad economy with an increase in costs is bad for stocks. Also, a company is in the same situation as a normal consumer - the more cash it carries, the more its purchasing power decreases with increases in inflation.

Fixed-income investors are the hardest hit by inflation. Suppose that a year ago you invested Rs.1,00,000 in a company FD with a 10% yield. Now that you are about to collect the Rs.1,10,000 owed to you, is your Rs.10,000 (10%) return real? Of course not!

Assuming inflation was positive for the year, your purchasing power has fallen and, therefore, so has your real return.

We have to take into account the chunk inflation has taken out of your return. If inflation was 4%, then your return is really 6%. This example highlights the difference between nominal interest rates and real interest rates. The nominal interest rate is the growth rate of your money, while the real interest rate is the growth of your purchasing power.

In other words, the real rate of interest is the nominal rate reduced by the rate of inflation. In our example, the nominal rate is 10% and the real rate is 6% (10% - 4% = 6%). As an investor, you must look at your real rate of return. Unfortunately, investors often look only at the nominal return and forget about their purchasing power altogether.



In 7 years, prices of pulses, oil & mutton nearly doubled

In the past seven years, the prices of many food items seem to have doubled in Delhi.

This is how inflation had reduced buying power of your money, what your 100 rupees could buy in 2007, now needs Rs.200/- to buy, or you need to reduce your purchases to half.

The Economic Survey of Delhi for 2014-15 shows that pulses, oil and even mutton are now twice as costly .
The survey , however, shows that potato and onion have registered an insignificant rise in their wholesale price since 2007  onion has gone up from Rs 1,107 per quintal to Rs 1,200 per quintal while potato is up from Rs 685 per quintal to Rs 750 per quintal. Against this, the price of pulses has risen exponentially in the wholesale market and its impact has been felt more acutely in the retail market. Arhar has gone up from Rs 3,365 per quintal to Rs 6,400 per quintal while price of moong has risen from Rs 3,784 per quintal to Rs 6,550 per quintal.

“Barring seasonal fluctuations in some commodities like onion, potato and wheat  due to decline in arrivals, inclement weather in the major producing areas, transportation bottlenecks, increase in cost of movement and lower stocks  the retail prices of most essential commodities have exhibited a steady trend in all metro cities in India.“ It has attributed the rise in prices to low production, market inefficiencies, wastage due to inadequate storage facilities etc.

In the case of pulses, a change in the minimum supply price has been instrumental in the sharp rise in prices, but more importantly , a shortage in supply is responsible for the rise in the price of grains. “Moong is the major crop grown in India but the rest is largely imported.The dollar exchange rate has also gone up significantly in he past 10 years. When we have been unable to meet demand, the prices will, of course, rise,“ he said.

The prices of chicks, medicine, feed etc have risen quite steeply over the past few years, resulting in a rise in the price of eggs.

Conclusion :: If your money is not getting appretiated (post tax cut) more than average inflation rate, then it is actually losing its value.

Suggestion :: Take risk, invest in much promising instruments and options, atleast don't kill your money.

Biggest Threat