High Inflation, Rising Interest Rates and Slowing Economy.

What Is the Relationship Between Inflation and Interest Rates?

Inflation is a general increase of prices in an economy. It is measured as the percentage change in the Consumer Price Index (CPI) over a period of time.?Interest rates are the payments that banks make on loans.

1. Both rates are important economic indicators that can help investors make informed decisions about the future.

2. Changes in these rates can have a direct impact on the economy, helping to determine whether things are going well or not.

3. It is important to keep an eye on inflation and rising interest rates in order to stay ahead of changes in the market.

4.Both rates are affected by a variety of factors, including monetary policy, supply chain disruptions, and commodity prices. Businesses need to stay up-to-date on these indicators so they can make sound financial decisions for their company.

The relationship between inflation and interest rates is complex. In general, when the rate of inflation rises, so do interest rates. This is because when prices are rising (inflation), people want to get a higher return on their money (interest). This can lead to a "rate hike" as the central bank tries to control inflation by raising interest rates. However, this is not always the case.

Interest rates rise around the world, as war and high inflation grind on

Interest rates have been rising around the world as after pandemic Russian Ukrainian war grinds on and inflationary pressures mount. In response, central banks have been tightening monetary policy, with the US Federal Reserve raising rates. This has led to concerns that the global economy may be heading for a period of sustained high interest rates, which could hamper growth.

How Do Higher Interest Rates Bring Down Inflation?

In India, the funds rate is the rate at which banks lend money to each other. The Reserve Bank of India (RBI) uses this rate to manage inflation. When inflation is rising, the RBI increases the funds rate to make borrowing more expensive and slow down the economy. This usually brings down the inflation rate. The repo rate is also known as the benchmark interest rate. When the RBI increases the repo rate, it makes it more expensive for commercial banks to borrow money, which is intended to control inflation. The reverse repo rate is the key interest rate at which the RBI borrows money from commercial banks. When the RBI decreases the reverse repo rate, it encourages commercial banks to lend money.?

The RBI has been increasing the repo and reverse repo rates in an effort to combat high inflation and promote economic growth. On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting at (June 8, 2022) decided to:

Increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 per cent with immediate effect.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

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Restructuring Your Portfolio Amid High Inflation, Growth Concerns & Rising Interest Rates

As inflation rises, it becomes more expensive to borrow money. This can cause problems for investors who have a portfolio that is heavily invested in growth stocks. As interest rates rise, growth stocks usually become less valuable. This can lead to investors having to sell their growth stocks at a loss in order to raise cash to pay off their debts.

Restructuring your portfolio amid high inflation, growth concerns and rising interest rates can be a difficult task. However, it is important to remember that inflation is not always a bad thing. In fact, during periods of high inflation, growth stocks often outperform other investments. Therefore, it is important to carefully consider your investment choices and make sure that your portfolio is diversified in order to protect yourself from the risks of high inflation. BASKET FOR EVERY RISK PROFILE

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