(Source: Office of Economic Advisor, PersonalFN Research)

 

The steep hike in prices of petrol brought in by the UPA Government, soon after the State Legislative Assembly elections (in Kerala, Tamil Nadu, West Bengal, Assam and Puducherry) has once again backfired on Government as WPI inflation for May 2011 fuelled to 9.06%. Moreover, inflation for March 2011 was also revised upwards to 9.68% compared to the provisional figure of 9.04%.

 

The Government at present is contemplating a hike in the prices of diesel and cooking gas; but such a move may further fuel WPI inflation. It is noteworthy that diesel is a widely used transport fuel and hence a absurd hike in the same may make fruits, vegetables and other food items too expensive as transport cost mounts. Moreover, if transporters agitate to such a move by going on a nation- wide stir it would criple supply across the country, thus putting upward pressure on food prices.

 

Food inflation at present (for the week ended May 28, 2011) has jumped to 9.01% due to costlier fruits, onions and protein-based items.

 

RBI’s stance in taming inflation:
 

The Reserve Bank of India (RBI) has been battling quite hard to tame WPI inflation since last March, but has not received much success in doing so. Since March 2010 it has raised policy rates 9 times successively as inflation continued to remain above their comfort range (of 8.00%, earlier the comfort zone was 7.00%).

 

	Increase / (Decrease) since March 2010	At present
Repo Rate	250 bps	7.25%
Reverse Repo Rate	300 bps	6.25%
Cash Reserve Ratio	100 bps	6.00%
Statutory Liquidity Ratio	(100 bps)	24.00%
Bank Rate	Unchanged	6.00%

(Source: RBI website, PersonalFN Research)

 

With these elevated levels of inflation, and it remaining sticky due to rise in food and fuel prices the RBI is likely be vigilant and may increase policy rates further. At its upcoming first mid-quarter review of monetary policy 2011-12 scheduled on June 16, 2011, we expect the RBI to raise policy rates by 25 basis points in a move to tame 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. Furthermore, rise in prices of diesel and cooking gas will add fuel to the fire and once again we may witness double digit e inflation. However, we may see softening of food inflation, provided the monsoons are normal this season. But the stickiness in inflation may not preclude RBI from raising interest rates further.

 

At its first mid-quarter monetary policy review 2011-12 scheduled on June 16, 2011 we expect RBI to increase policy rates (both repo rate as well as the reverse repo rate) by 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 that the Indian markets are currently showing some downtrend as they corrected smartly by 14% from their peaks (November 5, 2010 BSE Sensex was at 21,004.95), 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 $32 an ounce and today (i.e. on May 31, 2011) it is $1,535.5 an ounce – which indicates that price of gold has gone up by 48 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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Comments
mmiles@ywcasalem.org Jul 06, 2011 AKAIK you've got the answer in one!
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tcasseb@gmail.com Jul 07, 2011 Now I'm like, well duh! Truly thankful for your help.
gunkel@ids-mannheim.de Jul 08, 2011 Why do I btoehr calling up people when I can just read this!
dress@stgvs.tpc.edu.tw Jul 09, 2011 Hey, that's the greatest! So with ll this brain power AWHFY?

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