Portfolio Reallocation in Times of Rising Inflation and Interest Rate

Photo by Yiorgos Ntrahas on Unsplash

In a surprising and out of the cycle rate hike, on May 4th RBI monetary policy committee hiked the interest rate by 40bps, the biggest in two decades since the dot-com bubble of 2000. Benchmark index Nifty fell about 2.3% on the back of this announcement. On the same day, US Fed hiked the interest rate by a hopping 50bps. Tech heavy index NASDAQ was down 5% on the following day. The move was followed by other central banks as well. Bank of England raised by 25bps and forecasted inflation hitting 10%.

Impact of the Interest rate hike

When the interest rate goes up, the borrowing cost goes up. This will impact everyone, from ordinary retail people to corporates who borrow to finance their needs. To give a more simplified understanding, have a look at the below flow chart

Credits Yadnya Investments

Clearly, the beneficiaries of the rate hike should be Banks and NBFCs, provided their cost of funds is low. But on the receiving end of this rate hike would be companies that carry a lot of debt on their balance sheet. A small takeaway from this would be to select high-quality banks and NBFCs and remove high debt companies from your portfolio.


The crude, which was trading at 75$/Barrel at the beginning of this year, peaked at $129 during the first week of March, thanks to Russia’s invasion of Ukraine. So when the fuel costs go up, the cost of anything and everything which needs to be moved from one place to another goes up. That’s what we have been experiencing in consumer staples. For example, millennial’s favourite food Maggi hiked their price in March by 16.67%. A 70gm pack of Maggi used to cost ₹12 but now costs ₹14. Though this is just a two-rupees hike, most of us don’t mind paying. A competitor of Maggi, Yippee, would be thinking twice before going for a rate hike and might even decide to absorb this cost. As an investor, the drive home point is that Nestle was able to do this because it has pricing power and can pass on the higher input cost to its consumers, thereby protecting its profit margin.

Stock Picking During these times

  • Avoid stocks that cannot pass on their higher input cost to the consumers, thereby eroding their profit margins.
  • Avoid high PE stocks as the ease of availability of funds goes down; high PE stocks will see a selloff, but most of these high PE stocks are theme-based, and if you have high conviction in them, maybe you can enter them in this selloff. As Buffett says,

“Be fearful when others are greedy and be greedy when others are fearful.”

  • But if you are a mutual fund investor, continue your SIPs as you will be able to higher units at lower NAVs.


Inflation is the invisible tax, and many people don’t even realize the impact of this and the only tool that can beat inflation is equities. But in this falling market, don’t buy the stock just because it has fallen 30–40%. Analyze its customers, its supply chain, and of course, its balance sheet then takes an exposure.