Inflation monster continues to haunt
Apr 15, 2011

Author: PersonalFN Content & Research Team

WPI Inflation March 2011
(Source: Office of Economic Advisor, PersonalFN Research)

India’s headline inflation (as measured by WPI) for the month of March 2011 continues to disappoint not only the 'aam aadmi' but also the RBI and the Finance Ministry. The Wholesale Price Index (WPI) for the month of March 2011 once again rose to 8.98%, thereby completely crushing the expectations of the RBI and the Finance Ministry of a below 8% inflation rate by March end.

The Reserve Bank of India (RBI) has been battling with the inflation bug since last March, and has raised policy rates 8 times successively since then, as inflation remained above the comfort range (of 7.00%).

Policy rate tracker

	Increase / (Decrease) since March 2010	At present
Repo Rate	200 bps	6.75%
Reverse Repo Rate	250 bps	5.75%
Cash Reserve Ratio	100 bps	6.00%
Statutory Liquidity Ratio	(100 bps)	24.00%
Bank Rate	Unchanged	6.00%

(Source: RBI website, PersonalFN Research)

But at present although food inflation has mellowed to 8.28% (for the week ended April 2, 2011), the elevated prices of fuel (fuel index at 12.97% for the week ended April 2, 2011) and manufacturing items are attributing to stiffness in the WPI inflation.

Our view and outlook on policy rate:

We believe that the WPI inflation will continue to display a northward bias as long as fuel prices and non-food items continue to exhibit upward trend. This in turn would keep RBI vigilant about increasing policy rates in order to tame inflation without hurting growth. At its annual monetary policy review 2010-11 scheduled on May 3, 2011 we do not expect RBI to increase policy rates (both repo rate as well as the reverse repo rate) by more than 25 basis points, as any hawkish stance may derail growth.

Where you should invest as inflation risk remains?

But in order to safeguard yourself against inflationary pressures building in, you investors need to wisely focus on the following two major asset classes which can enable your portfolio deliver positive returns after accounting for inflation.

Equity:

Yes, we aren’t ruling out the fact that the Indian equity market have risen by +9.1% (after shaving-off 13.3% in the month of January and February). But as Indian market shows knee-jerk reactions to this downbeat economic data, you investors need to enter the equity markets.It would be wise to stagger your investments and adopt the SIP (Systematic Investment Plan) / STP (Systematic Transfer Plan) route while investing in equity mutual funds, as this will enable you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding. But remember, while investing select only those equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

Gold:

This asset class has displayed a secular uptrend since a long time now. In 1971, the price of gold was about U.S. dollar 32 an ounce and today (i.e. on February 28, 2011) it is U.S. dollar 1,431 an ounce –which indicates that price of gold has gone up by 44 times over the last 40 years. Moreover, whenever economic uncertainties increase gold tends to become bold, thus acting as a safe haven. Hence, at PersonalFN, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.

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