DO AND DON’T THAT AN INVESTOR SHOULD FOLLOW WHEN INFLATION IS SET TO INCREASE IN NEXT 2 TO 4 QUARTERS

1. FACULTY NAME : MRS. ANJU ANAND
BATCH: JAI01AA1015 (MALVIYA NAGAR , JAIPUR)
DO AND DON’T THAT AN INVESTOR
SHOULD FOLLOW WHEN INFLATION IS SET TO INCREASE IN NEXT 2 TO
4 QUARTERS
PARTICIPANTS NAME REGISTRATION NUMBER
ANCHAL JADON E14CC1015949
SHUBHANGI SHARMA E14CC1017169
PALLAVI GUPTA E14CC1017594
HIMANSHU JAIN E14CC1016627
VIKAS DIVEDI E14CC1016891

2. S. NO DESCRIPTION
1 INFLATION
2 INDIA’S INFLATION RATE
3 EFFECTS OF INFLATON ON MARKET
4 EFFECTS ON RBI INEREST RATES
5 DO’S FOR AN INVESTOR WHEN HIGH INFLATION IS
EXPECTED
6 DONT’S FOR AN INVESTOR WHEN HIGH INFLATION IS
EXPECTED
7 CASE STUDY
8 CONCLUSION

3.  Source: Investopodia
 Source: Ministry of Statistics and Programme Implementation (MOSPI)
INFLATION CONCEPT
•Inflation is a rise in the general level of prices of goods and services in
an economy over a period of time.
• When the level of currency of a country exceeds the level of
production inflation occurs.
•Value of money depreciate with the occurrence of inflation
•When the price level rises, each unit of currency buys fewer goods and
services.
•A rise in inflation is accompanied by a decrease in purchasing power
and has an impact on corporate asset values and in financial investing.
“
“The inflation rate in India was recorded at 5.11 percent in January of 2015. Inflation
Rate in India averaged 8.87 percent from 2012 until 2015, reaching an all time high of
11.16 percent in November of 2013 and a record low of 4.38 percent in November of
2014. The current base year of inflation is 2011-2012”

4. Source: http://www.tradingeconomics.com/india/inflation-cpi

5. EFFECTS OF INFLATION ON MARKET
NEGATIVE EFFECTS OF INFLATION
•Include loss in stability in the real value of money and other monetary items
over time.
•Uncertainty about future inflation may discourage investment and saving
•High inflation may lead to shortages of goods if consumers begin hoarding
out of concern that prices will increase in the future.
POSITIVE EFFECTS OF INFLATION
Include a mitigation of economic recessions, and debt relief by reducing the
real level of debt.
Source: http://csanad.hubpages.com/hub/Effects-of-inflation

6. EFFECTS
ON RBI
INEREST
RATES
BANK RATE OF INTEREST
During Inflation , RBI increases the
bank rate of interest due to which
borrowing power of commercial
banks reduces which thereby
reduces the supply of money or
credit in economy
OPEN MARKET OPERATIONS
During inflation, RBI sells
securities in the open market
which leads to transfer of money
to RBI.
STATUTORY LIQUIDITY RATIO
During Inflation SLR increases
and the lending capacity of
commercial banks decreases,
thereby decreasing the supply
of money.
CASH RESERVE RATIO
During Inflation, RBI increases the
CRR due to which commercial
banks have to keep a greater
portion of their deposits with the
RBI, thereby decreasing the supply
of money.
DEFICIT FINANCING
During Inflation, RBI will stop
printing new currency notes
thereby controlling inflation.
EFFECTS ON RBI INEREST RATES
Source: http://www.financialexpress.com/article/economy/raghuram-rajans-rbi-effects-
surprise-repo-rate-cut-analysts-says-real-effect-not-much/30277/

7. Gold
Bonds
Stock Market
Invest in Forex
Bank Products
Exchange Treaded partnership
Exchange Traded Funds
Purchase foreign securities
DO’S FOR AN INVESTOR WHEN HIGH INFLATION IS
EXPECTED
INVEST IN A MIXED PORTFOLIO

8. Invest in stocks of oil,
gasoline, consumer
products ,gold
companies and
technologies.
Invest in stocks of necessary good selling
company stocks like toothpaste, soap will
continue to purchase even when they cost
more , to higher returns
STOCKS MARKET
Source : www.marketoracle.co.uk
EQUITY MUTUAL FUNDS
Invest in mutual funds
to avoid direct risk

9. Gold is also a popular inflation
hedge. Investors tend to turn to
this precious metal during
inflationary times, causing its
price to rise silver and other
metals also tend to gain value
during inflationary times.
GOLD
Source: goldratefortoday.org
NOTE:
The percentage allocation can vary in the of high inflation towards
higher yielding investments like mutual funds and equity in case
market don’t merit investment and are on downswing then the
good old gold comes to rescue.
Source: http://www.investopedia.com/

10. INVEST IN FOREX
• If it is expected that inflation will come in future, an investor should be
suggested to purchase dollars or other currencies.
•Weak domestic currency implies higher returns can be found abroad.
Invest in foreign currencies.
ETF (EXCHANGE TRADED FUNDS)
•Globally ETF have opened whole new investment opportunities to retail
as well as institutional managers.
•They enable exposure to managers to entire stock market in different
countries. It’s like a Mutual fund which they can sell and buy in real time
as price changes whole day.
FOREX
Source: http://www.investopedia.com

11. PURCHASE FOREIGN SECURITIES
An Inflation of India will not affect the Japan's Economy. In the
same way having Japanese investment will allow an investor to have
a small cushion of protection against loss due to India’s Inflation.
INFLATION INDEXED BONDS
There are two types of bonds issued by RBI which protect investor
from inflation.
IIB and IINSS-C. (Inflation Index bonds and Inflation Indexed
National Saving Securities Cumulative) are issued and outsourced
respectively to adjust changes in inflation and help protect
investors from inflation because both their principal and their
interest payments adjust as the CPI changes.
FOREIGN SECURITIES AND BONDS
Source: http://www.investopedia.com

12. DON'TS FOR AN INVESTOR WHEN HIGH
INFLATION IS EXPECTED
Do not buy
fixed income
securities
Not all
stocks
market
companies
are inflation
hedge. Be
careful
Don’t invest in
long term bonds.
They are not
safe inflation
hedges.

13. •Many investors buy fixed income securities because
they want a stable income stream, which comes in the form of
interest.
•However, because the rate of interest on most fixed income
securities remains the same until maturity, the purchasing power
of the interest payments declines as inflation rises.
• REAL RETURN = NOMINAL RETURN – INFLATION
IF INFLATION > NOMINAL RETURN,
REAL RETURN BECOMES “NEGATIVE’’
Source: http://articles.economictimes.indiatimes.com/2011-06-
27/news/29708973_1_debt-mutual-funds-repo-rate-interest-rate-scenario

14. • Not all stocks market companies are inflation hedge. One
should strike a balance between safety and returns by building
a diversified portfolio.
• Stocks are not good short-term hedges against rapidly
increasing inflation, but bonds are worse.
• Investing in long-term bonds in a high-inflation environment,
it's on the bond side where there's a lot more trouble.
Source: http://articles.economictimes.indiatimes.com/2011-06-
27/news/29708973_1_debt-mutual-funds-repo-rate-interest-rate-scenario

15. INFLATION VERSUS RETURNS ON VARIOUS INVSTMENTS
STATISTICS
Source: http://mrraghucfa.blogspot.in/2014/05/the-debilitating-
effect-of-inflation-on.html

16. Customer A and B have come to ABC bank to invest
their money. Customer A as well as customer B
want to put their money in the Fixed Deposit at a
normal prevailing rate. The bank advisor advised
that they should not invest their money in fixed
deposits as inflation rate is expected to go up soon
and the interest rates will be revised to upwards.
So, in place of fixed deposits they should invest
their money in gold, government bonds or invest in
equity. Customer A decides to go with bank advice
and customer B refuses and decide to invest in old
fashion.
CASE STUDY

17. OUTCOME
After 8 weeks the customer A who invested his (x)
amount gained the profit as his money became
(x++) in real money term whereas the customer B
who also invested his (x) amount got (x+) amount
only, that means in real terms he was left with (-x)
and his real value liquid assets dropped to
substantial amount.
He could have earned a lot more if he had followed
the banker’s advice.

18. • Inflation will always be with us; it's an economic fact of life.
• It is not intrinsically good or bad, but it certainly does
impact the investing environment.
• Investors need to understand the impacts of inflation and
structure their portfolios accordingly.
•Depending on personal circumstances, investors need to
maintain a blend of income and investments with adequate
real returns to address inflationary issues.
CONCLUSION

19. THANK YOU