The Consumer Price Index (CPI) Inflation Rate has risen to 7.35% in December 2019, wiping out the returns on several fixed income products such bank fixed deposits. The inflation rate is the highest since July 2014. The surge in prices was driven by a jump in the prices of vegetables which jumped by 60.5%. Core inflation (which strips out this effect) stood at 3.7%.

Should you worry?

“Food inflation tends to be transient. Earlier there was no explicit inflation targeting which now the RBI’s Monetary Policy Committee does. Debt investors should not panic. In the long term as infrastructure improves, inflation should remain around 4%," said Dwijendra Srivastava, Chief Investment Officer (Debt) at Sundaram Mutual Fund. “But I would expect a hardening of the RBI outlook towards interest rates following this," he added. “The inflation number has to be seen in the context of volatile vegetable inflation and last year’s base effect. Market rate cut expectations, if at all, will be pushed back," said Arvind Chari, head, fixed income and alternatives, Quantum Advisors Pvt. Ltd.

What’s your Plan B?

While the dominant expectation is that the inflation spike is temporary, financial advisors have suggested options for those who wish to protect themselves from high inflation. “Investors should move more of their portfolios into equities," said Bhavik Dand, a Mumbai-based independent financial advisor. Of course keep In mind that equities is a long term product and so money parked for a long term goal can be shifted to equities. Companies move the prices of their products higher with inflation and this protects their earnings and hence investor returns.

Other than that an investor’s portfolio can have some allocation to international funds and the yellow metal. “International funds in particular can shield investors from inflation because they benefit from both earnings growth and rupee depreciation," he added. For those who wish to stick to fixed income, Dand suggested corporate fixed deposits. You can find a list of high rated corporate fixed deposits here.

However Mint Money advices caution as these comes with more risk even as they come from the stable of fixed income products. Amol Joshi, founder, Plan Rupee Investment Services recommended gold as a hedge against inflation. “Sovereign gold bonds which track the gold price and pay 2.5% interest are one of the best ways of investing in gold," he said.