Author : Siddhartha Bhaiya

Inflation is on the rise and this impacts everything; right from your savings and EMIs, to your investments. Understanding its impact and planning for it will help you gain in the long run. Leading boutique investment firm Aequitas shares its recipe to showcase the correlation of Inflation, Interest rates, Financials and with Consumption!
Surplus liquidity in the system, combined with low interest rates and high consumer demand has resulted in a rise of inflation in India. Supply constraints and logistic issues have further fueled this rise. Here are a few pointers to help you understand the cause of inflation, its impact and how to make the best of this situation.

1. The Cause
Over the last 18 months, we have seen unprecedented inflation in steel, coal, gas and iron ore sectors. With the increase in prices of these raw materials for all commodities, coupled with high demand of its finished goods, caused by low interest rates; we are now seeing a gradual increase in the price of finished products. A car that cost Rs. 6-7 lakhs a couple of years ago now costs almost Rs. 14 lakhs. This increase in demand coupled with supply constraints, which can be overcome quickly, means inflation is here to stay for a long-run.

2. Its impact – Overall
Driven by the high demand and supply constraints, the inventory will need to continuously replenish and it will lead to downward percolation of inflation meaning eventually, this will result in companies having to pass on the increased pricing to the end consumer. This will have a knock on effect in the form of rising interest rates and EMIs, which over a period of time, will affect the discretionary spending we are seeing today. Even government spending on projects will go over budget.

3. Its impact – Consumer Stocks
With the above impacts of inflation, we will eventually see the demand for discretionary goods go down. This, combined with the rising wage inflation will have a negative impact on the stocks of this category.

4. Its impact – Financial Company stocks
Contrary to belief, inflation is not good for the bottom-line of financial companies. With 30% of their investments in bonds, a rising interest rate brings about a fall in bond prices. This combined with the struggle for some companies to repay their loans, will lead to a rise in NPA, thus affecting the stock prices of these interest-rate sensitive companies in the long run.

5. Making the best of the situation
The last 18 months affected the unorganised sector massively, almost wiping out this sector. Now, the rise in inflation will be the cause of its resurgence, driven by the fact that pricing will again be a primary factor of purchase decisions. Add to that, the current situation of lack of trust with China, great opportunities for Indian companies to flourish will open up in the long-run. These factors combined will create a great opportunity for manufacturing and commodities stocks to be bullish in the long run, while consumer and financial company stocks will take a hit.

So early planning and being ready for the expected change in the investment horizon over the next 4-5 years, is going to be the key to your financial success.

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