The Inflation Story

You can call him a bank robber and that too a perfect one, perfect because no one knows that one is being robbed and is always happy sitting on a cushion of huge cash. This is for people who keep large balances in their savings account; inflation erodes the value of their money.

With inflation at 6% and interest of 3.5% on your savings bank account you are earning a differential amount of 2.5% which is negative. This implies 4 lakhs in your account for one year translates to 390000 a loss of 10000 a year. The longer your cash stays in your account the more the loss.

The inflation rate for the whole country means little; if we take it to be city specific then the loss is huge. I leave the calculations to you.

Ranchi 12.8%

Bhopal 11.7%

Patna 10%

Jaipur 8.5%

Hyderabad 7.7%

Ahemedabad 7.2%

Bangalore 6.8%

Lucknow 6.8%
Kolkata 6.4%
Mumbai 6%
Source Money Today January 11 2007

So what is the way out? We know that we can’t avoid the effects if inflation, but we can always move our cash to some better avenues than keeping it our savings bank account.

You can formulate a strategy to have an optimal amount of cash (say one months salary, this amount should be as per your liquidity requirements).

• You can tell your bank to auto sweep the surplus cash to an FD (giving a better interest rate)
• If you can take some risks then you can go for Systematic investment plan in a mutual fund or regular investments in shares.

Currently I am planning to have a month’s salary into my account by the year end and rest into equities (see my financial goal for 2007 Holdings). So the next time you feel proud to have large balances in your account then know that you are being robbed.