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Understanding the impact of inflation on savings account

Understanding the inpact
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Inflation, which is often discussed by financial experts, represents the silent erosion of purchasing power of money. The phenomenon of inflation significantly influences how people approach savings and investments.
This article examines the intricate dynamics between inflation and savings accounts, providing a comprehensive guide for investors of mutual funds, particularly those interested in market investments and wealth generation.

  • Table of contents
  1. How inflation shrinks savings?
  2. How to safeguard your income?
  3. FAQ

How inflation shrinks savings?

Amid today's economic conditions, the impact of inflation on savings accounts is a significant challenge for individuals with savings and investments as it reduces the buying power of money. If you're a retiree relying on your savings, maintaining the same lifestyle becomes challenging as inflation chips away at your purchasing power each year.

But inflation doesn't just affect retirees; it can impact you even before retirement. Imagine diligently saving for a particular goal, like your children's college fund or a home down payment. The purchasing power of your money might decrease over time as you continue to save, preventing you from meeting your financial objectives.

While savings accounts offer liquidity and interest, they aren't resistant to inflation’s corrosive effects. The money deposited in these accounts may grow nominally but depreciates in real terms due to the rising prices of goods and services. Therefore, to navigate savings and investments effectively, it's crucial to grasp the concept of inflation and its implications on your financial strategy.

The year 2020 witnessed a significant inflation spike in India, reaching 6.62% amid the COVID-19 pandemic, and subsequently moderating to 5.13% in 2021. Currently averaging around 5.51% (Jan to May 2023), inflation remains a consistent factor impacting investments.

Geopolitical events and fluctuations in crude oil prices contribute to the current global economic challenges. In India, the Reserve Bank of India (RBI) has adeptly managed to curb the inflation rate, providing a hint of stability. However, it remains crucial for investors to select savings accounts offering interest rates exceeding the prevailing inflation rate to ensure effective wealth preservation amidst economic uncertainties.

How to safeguard your income?

Safeguarding your income against rising inflation involves strategic moves that align with your financial goals. Here's a breakdown of actionable steps to protect your wealth:

  • Consider adding inflation-resistant diversifiers: Inflation can be daunting, but a well-diversified portfolio, including traditional stocks and bonds, offers a degree of cushion against inflation. Historically, such portfolios have shown resilience, even during periods of high inflation.
  • Take a close look at your budget: In times of inflation, a meticulous budget becomes your ally. Assess your spending, identify unnecessary expenses, and align your financial objectives with goal-based savings.
  • Don't get too comfortable with cash: While market volatility might tempt you to shift assets to cash, it can be counterproductive in an inflationary environment. Explore alternative investments that can outpace inflation and contribute to your financial growth.
  • Reassess your emergency fund:Inflation calls for a reassessment of your emergency fund. Consider keeping more cash on hand to cover the rising cost of living. Aim for an emergency fund that covers 3 to 6 months' worth of expenses.
  • Reduce your tax liability: Enhance your financial resilience by optimising tax efficiency. Utilise market volatility for tax-loss harvesting and strategically place investments to lower your overall tax bill.

Remember, there's no one-size-fits-all solution. Tailor your approach based on your wealth level and life stage, guided by a robust financial plan that provides comfort amid market uncertainties.


Over time, inflation can erode the purchasing power of your money. The good news is, there are ways to protect the value of your savings. This involves investing, but it's essential to keep your risk at a moderate level. Opt for savings accounts with higher interest rates, embrace features like sweep-in, and make informed investments to not only weather inflationary storms but to thrive financially. Always remember to consult financial advisors for personalised investment advice tailored to your unique financial goals, fostering a path to sustainable wealth generation.


How does inflation affect savings accounts?
A: Inflation diminishes the real value of money in savings accounts as prices rise. Thus, even as your savings grow moderately, they are unable to keep pace with rising inflation.

How can I potentially safeguard my savings from inflation?
A: Utilise features like the sweep-in option, budget effectively, and consider long-term investments to mitigate the effects of inflation on your savings.

Why is monitoring interest rates important for savings accounts?
A: Keeping an eye on changing interest rates helps ensure that your savings account earns returns higher than the prevailing inflation rate, aiding in effective wealth preservation.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.