Calcutta, June 20: The last time inflation crossed 11 per cent in India, you could have bought a kilo of potatoes for Rs 4 in Calcutta and earned a handsome 13 per cent interest, along with a 10 per cent maturity bonus, on the post office monthly savings account.

Thirteen years on, the price of potato has doubled to Rs 8 and the maturity bonus on the popular small savings scheme has halved to 5 per cent. The annual interest on the scheme also has come down to 8 per cent from 13 per cent.

In other words, you have lost money if you kept your savings in the post office where the real rate of interest (the nominal interest rate minus the rate of inflation) has turned negative by 3.05 per cent.

All small savings schemes, including the Public Provident Fund, gave 12 per cent interest in 1995 compared with 8 per cent now. Even the maximum interest rates on bank fixed deposits, which were between 11 per cent and 11.25 per cent in 1995, are hovering around 9 per cent after the latest round of hikes by several banks this month. Thus, the inflation rate of 11.05 per cent has made the real rate of interest on bank deposits negative.

A negative real interest rate eats into your savings. Suppose you had put Rs 100 in the post office scheme or a bank fixed deposit. At an interest rate of 8 per cent or 9 per cent, your savings would have become Rs 108 or Rs 109 in 12 months.

What you could have bought for Rs 100 a year ago will cost you Rs 111.05 now, given the 11.05 per cent rate of inflation. In other words, you would have been better off had you bought the article instead of keeping the money in the post office or the bank.

Among the hardest hit by inflation are the salaried. It reduces the purchasing power of those with fixed income, forcing them to dip into savings to meet expenses their regular salary should have taken care of under normal circumstances.

The despondency sometimes drives people to the share markets in the hope that short-term investments in equities will help them beat inflation.

But remember: the equity markets also have a distaste for high rates of inflation and you should prepare yourself to stay invested for some time.

Between October last year, when inflation slipped below 3 per cent, and now, the BSE sensex fell by 26.55 per cent.

More recently, between April (when the inflation rate started to soar) and now, the index declined by 15.71 per cent because of concerns over spiralling prices.

These are, however, short-term blips. Given the gross savings rate at 35 per cent, the country can manage an 8 per cent GDP growth at least in the current year that can translate into a 15 per cent profitability growth for corporate houses.

This makes equity investments, either direct or through mutual funds, a sensible option because some good stocks are now available at their 52-week low prices. The catchword is patience, which is needed to weather the inflation storm.

Investments in physical gold or gold exchange-traded funds could be another way to beat inflation. The inflationary situation this time round is not a local phenomenon, but a global concern. In such a situation, investors in other parts of the world turn to gold for hedging. Gold funds listed on the BSE and the NSE have also given a return of over 40 per cent during the last 12 months.

Any move by the RBI to increase lending rates to tame inflation will hurt those who have taken a long-term loan, such as a housing loan, on floating rates.

However, when banks start increasing deposit rates, savers stand to benefit. Several banks have increased their deposit rates and a second round is expected very soon.