Retail inflation in India fell to 7.04% in May, from an eight-year high of 7.79% in April. Despite a 0.75 percentage point decline in the consumer price index, the indices for ‘food and beverages,’ ‘clothes and footwear,’ ‘housing,’ and ‘fuel and light’ all increased from April.   

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For the fifth month in a row, inflation has stayed over the RBI’s 6% upper tolerance limit. Furthermore, soaring global crude oil prices, along with rupee depreciation, may exacerbate inflation concerns. The RBI forecast last week that inflation would stay at 6.7%, above its mandatory band for the rest of the year. 

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The central bank is expected to hike interest rates at bi-monthly monetary policy review meetings again in August and October, according to economists. In the previous two months, the RBI has raised interest rates by 0.9 percentage points.

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Higher inflation reduces the value of one’s portfolio and certain debt instruments may provide returns that are lower than inflation. The cost of products and services soars, putting a strain on household budgets. Loans will also become more expensive and the equity markets may stay volatile owing to interest rate hikes by the central bank to fight inflation.

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For example, after a year, the value of Rs 1 lakh is reduced to Rs 93,423 at an inflation rate of 7.04%.

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Investors need to keep inflation in mind while developing a strategy for their portfolios and look for investments that can provide long-term returns that outperform inflation. The key is to have the correct equity and debt allocation based on risk profile and goals. Analysts suggest SIPs to ride out the volatility.