High inflation takes toll on borrowers, investors

New Delhi: A high rate of inflation hurts the poor, hits demand for consumer goods and adversely impacts investment demand.

Sandeep Bagla, CEO, TRUST MF, said that it is widely believed that inflation rate in any economy should be stable at low levels. If rates are too high and volatile, the borrowers cost of capital goes up, making them uncompetitive in the global business arena.

Bagla said high interest rates reduce demand for houses, cars, consumer goods as high EMIs prevent consumers from buying things on loan. Investment demand is also suppressed as new business projects become unviable.

High inflation hits the poor people harder as their income is low and they are not able to afford regular consumer items. For savers, optically the interest income rise, but inflation being high, their purchasing power is adversely impacted. Consumers cannot maintain their standard of living as inflation for their consumption basket could be higher than the interest rates that earn on their savings. Politicians could lose elections over high inflation. "So high inflation is neither good for borrowers nor investors. Governments try to maintain low positive inflation," he said. In India, RBI has taken a target to maintain inflation at 4 per cent plus minus 2 per cent, i.e., in a range of 2 per cent to 6 per cent. Inflation also reduces the effective value of savings.