369489 SIP myths you must know!

India is passing through the most trying times since Independence. The type of economic contraction, loss of employment, wage cuts and ruined businesses that the country is witnessing on top of the millions of infection and deaths under the most horrific situations is not only unprecedented but also beyond the pale of apocalyptic nightmares.

As if all these weren’t enough, inflation has constantly been gnawing at the purchasing power of the wallet of the common man. Over the past few months, CPI-based inflation has been ruling upwards of 5%, which is the upper band of the 4% (plus/minus) 2% band that the RBI has been mandated to follow. While the rate above 5% has been difficult enough, wholesale price inflation is now surging, reaching a frightening 10.49% in April, which is about 11-year high.

Any rise in WPI-based inflation is usually transmitted to CPI-based inflation with a lag. If that happens the common man will be in for very rough times as the second wave of COVID brings more and more states under its grip.

For more than a decade India is passing through declining interest rates. The common man can easily get crushed between low interest rates and high inflation rates and only the government can save them from this pincer attack. A large section of the vulnerable population – both at the bottom of the pyramid and those past their earning lives – are critically dependent on interest income from guaranteed-returns instruments.

Rising inflation erodes the purchasing power of the meagre nominal interest that those instruments offer. Last year, inflation rose fast due to supply constraints. Though the government has not opted for countrywide lockdown, increasing restrictions in different states might disrupt supply chains of various commodities. The government has to work overtime to ensure that inflation does not rise beyond a point, irrespective of the reason.