Fighting Inflation in India

A favorite topic of WSJ and FT and other personal finance websites these days is - what is the best investment in these times of inflation for retail investors?

My take on somebody investing in India is:

It is not bonds - anyway one can't buy any
It is not stocks - contrary to what everyone else says
It is not real estate - this is a global real estate bust and it is reaching India - so wait for 4 years.
It is cash

Yes, one will earn less than inflation today on cash. One year down the line though, when bonds are cheaper and so are stocks and so is real estate, that same cash can be deployed into other assets which have fallen much harder. Think about relative valuation between assets one year down the road, rather than value of an asset against inflation.

That bonds will fall as inflation rises - that is clear.

That stocks will fall as inflation rises - that goes against conventional wisdom which says stocks return 10% + every year over long periods. That is incorrect. Anyone who invested in US in 2000 has earned 0% over last 8 years. The starting point is important.

And today, the starting point for investing in equities to protect against inflation is not right. Corporate ROEs are at all time highs - inflation will hit margins and lead to downwards earnings revisions, and stocks will find it very hard to go up in such an environment. Besides, if bond yields rise because of inflation (as they have in India and around the world over the past 1 month), the economy gets its third shock of the year.

First shock - subprime and credit crunch
Second shock - oil prices
Third shock - rising inflation and bond yields

A one year FD in India is yielding 9.5%. Why take the risk? Sit in cash and do nothing. As they say, when to hold it and when to fold it is important in poker. This is the time to fold and not to hold.