Inflation and its impact

1 | P a g e
Submitted by
Vinay Kumar Maurya (15) MBA (EP)
Submitted to
Prof. Tilak Raj Kapoor
Inflation, its Impact on Stock Market

2 | P a g e
ABSTRACT
The relationship between stock prices and inflation has been subjected to
extensive research in the past decades and has arouse the interests of
researchers, academics, practitioners and policy makers globally,
particularly since the 1990s. This research paper tries to examine the
relationship of inflation with Indian stock market and also what impact
inflation leave on Indian Stock Market. Further this research paper attempt
to investigate to what extent inflation affects stock market. For this purpose,
some stock indexes are selected to see the effect of inflation. These indexes
are BSE SENSEX, NSE NIFTY,BANK NIFTY, and BSE FMCG. In our
research, the inflation data is taken according to CPI (consumer price index).
The statistical has used in this research to do the analysis based on yearly
to find out the relationship between inflation and stock market.

3 | P a g e
Acknowledgement
One of the best parts of preparing this project is the opportunity to thank
those who have contributed to its preparation. The list of expression of
thanks – no matter how extensive is always incomplete and inadequate,
these acknowledgements are no exception. Therefore, we would like to
thank our professor of Business Economics, Mr Tilak Raj Kapoor, for his
unwavering guidance and help in completing this research project. His
suggestions and support to improve my research methodology was valuable
for the completion of this project successfully. Also, we wish to thank all those
authors whose journals we referred to and websites.

4 | P a g e
CONTENT
1) Objective of study 05
2) Introduction of Inflation 06
3) Type of Inflation 07
4) Causes of Inflation 09
5) Effect of Inflation 13
6) Comparison with GDP 17
7) Stock Market 20
8) BSE SENSEX 23
9) NIFTY 50 26
10) NIFTY BANK 29
11) BSE FMCG 32
12) Final observation and conclusion 35
13) Reference 36

5 | P a g e
Objective of Study
The objective of study was to find out the effectiveness, Impact and
relationship of Inflation with the Indian Stock Market and to uncover the
impact of inflation on Stock Market. There were many objectives behind
conducting the study but the main objective was to find out the nature of
relationship that Indian Stock Market has with Inflation because inflation has
considerable influence on economy and Stock Market The project was begin
with an extensive introduction about the inflation, stock market and how
inflation affect stock market and economy. In this research the data were
taken on yearly basis. The inflation data is taken on annual basis according
to CPI (Consumer Price Index). The data of all the indices also taken on
annual basis, the data of index is taken on closing price for all years.
• Impact of Inflation on Economy
• Impact of Inflation on GDP growth
• Impact of Inflation on Investing activity
• Relationship between Inflation and Stock market
• Relationship between Inflation and Banking growth
• Relationship between inflation and FMCG sector

6 | P a g e
INFLATION
Inflation can be defined as a rise in the general price level and therefore a
fall in the value of money. Rate at which the general level of prices for goods
and services keep on rising, and leads to subsequent fall in purchasing
power of the currency, is often referred to as inflation. So, when inflation
rises, every Rupee spent by us would buy a smaller Quantity of goods and/or
services. Central banks i.e. Reserve Bank in case of India, therefore
attempts to stop severity of inflation.
Modern Economy is money-based economy. Success of Morden business
is determined by Wealth creation. In the set of productive business resources
described as 5Ms: Man power, Material, Machine power, Management,
Money; Money power is regarded is more important for the business
adventure. Finance matter the most.
“The word inflation in the broadest possible sense refers to any increase in
the general price-level which is sustained and non-seasonal in character”
-Peterson.

7 | P a g e
Types of inflation
1) Moderate
2) Galloping
3) Hyper Inflation
1) Moderate inflation: It is mild and tolerable form of inflation. It occurs
when prices are rises slowly. When the rate of inflation is less than
10% annually or it is a single digit annual inflation rate, it is considered
to be a moderate inflation in present day economy.
Characteristics of moderate inflation
a) There is single digit inflation rate annually.
b) It does not disturb economy balance.
c) It reagreed as a stable inflation in which the relative price do not get
far out of line.
d) People’s expectation remains more or less stable under moderate
inflation.
e) Under a low inflation rate, the real interest rate is not too low or
negative. So, money can serve its role as a store of value without
difficulty.
f) There are modest inefficiency associates with moderate inflation.
Economist have arbitrarily laid down that a 3-4% per annum is tolerable
rate of inflation in modern economies. Even Chakravarty Report 1985 of RBI
has accepted 4% of inflation annually to be an efficient a tolerable norm for
the Indian economy
2) Running & Galloping inflation: When movement of price accelerate
rapidly, running inflation emerges. Running inflation may record more
than 100% rise in prices over a decade. Thus, when prices rise more
than 10% a year, running inflation occurs.
Economist have not described range of running inflation. But we may
say that a double-digit inflation of 10-20% per annum is a running
inflation. If it exceeds that figure it may be called ‘Galloping inflation’.

8 | P a g e
According to Samuelson, when prices are rising at double- or triple-
digit rate of 20, 100, 200 percent in a year the situation may be describe
as Galloping inflation.
Indian economy has witnessed a sort of running and Galloping inflation
to some extent (not exceeding 25% per annum) during the planning
era, since the 2nd
plan period.
3) Hyperinflation: In the case of hyperinflation, Prices rise every
movement and there is no limit to the height to which prices might rise.
There for it if difficult to measure its magnitude, as prices rise by fits
and starts.
In quantitative terms, when pieces rise over thousand percent in a
year, it is called a hyperinflation, Austria, Germany, Hungry, Poland,
Russia witnessed hyper inflation in the wake of world war I.
The most recent example of hyperinflation, Zimbabwe’s currency woes
hit a peak in November 2008, reaching a monthly inflation rate of
approximately 79 billion percent, according to the Cato Institute.
The main features of hyper-inflation are:
a) During hyperinflation, the price rise is severe. The price index
moves up by leaps and bounds. It is over 1000% per year. There is
at least 50% price rise in a month.
b) It represents the most pathetic deterioration in people’s purchasing
power.
c) It is apparently generated by a massive fiscal dislocation.
d) Hyper inflation is a monetary disease.
e) Structure of relative prices of goods become highly unstable.
f) Overall economic distortions take place.

9 | P a g e
Causes of Inflation
Inflation occurs when the amount of buying power is higher than the output
of goods and services. There are two major possible causes of inflation. First
one is Demand-pull element and the second one that cost-push element as
an important cause of inflation.
1) Demand-pull Inflation: when the economy is at or close to full
employment, then an increase in aggregate demand leads to an
increase in the price level. As firms reach full capacity, they respond
by putting up prices leading to inflation. Also, near full employment with
labour shortages, workers can get higher wages which increase their
spending power.
Example: In the 1980s, the UK experienced rapid economic growth.
The government cut interest rates and also cut taxes. House prices
rose by up to 30% – fuelling a positive wealth effect and a rise in
consumer confidence. This increased confidence led to higher
spending, lower saving and an increase in borrowing. However, the
rate of economic growth reached 5% a year – well above the UK’s
long-run trend rate of 2.5 %. The result was a rise in inflation as firms
could not meet demand. It also led to a current account deficit.
Some causes that sudden increase the demand
a) Increase in public expenditure: There may be increase in in public
expenditure in excess of public revenue. This might have been
made possible through public borrowing from bank or through deficit
financing which Implies an increase in the money supply that’s lead
to increase in demand than supply.
b) Increase in investment: There may be an increase in the
autonomous investment in firm, which is excess of current saving in
the economy. Hence the flow of total expenditure tends to rise,

10 | P a g e
causing an excess monetary demand, leading to an upward
pressure on prices.
c) Increase in MPC: There may be an increase in marginal propensity
to consume (MPC), causing the excess monetary demand. This
could be due to the operation of demonstration effect and such other
reason.
d) Increase in export and surplus balance of payments: In an open
economy, an increasing surplus in the balance of payment also
leads to an excess demand. Increasing export also have an
inflammatory impact because there is generation of money income
in the home economy due to export earning, but simultaneously,
there is reduction in the domestic supply of goods due to export. If
an export surplus is not balanced by increasing saving, or through
taxation, domestic spending will be in excess of the value of
domestic output, marketed at current price.
e) Diversification of resources: Diversification of resources from the
consumption goods sector to either capital goods sector or military
goods sector will lead to an infantry pressure because while the
generation of income and expenditure remain continue, the current
flow of real output decreases on account of high gestation period
involve in this sector.
f) Role of Black Money: In India there is a huge accumulation of
unaccountable money. A large part of unaccountable money use in
buying and selling of Real estate in urban areas, extensive hording
and black marketing in many essential goods.
2) Cost-push Inflation: Cost-push inflation occurs when overall prices
increase due to increases in the cost of factor of production. Higher
costs of production can decrease the aggregate supply in the
economy. Since the demand for goods hasn't changed, the price

11 | P a g e
increases from production are passed onto consumers creating cost-
push inflation.
Example: Cost-push inflation occurred in the 1970s oil market. The
price of oil is controlled by an intergovernmental body known as
OPEC—the Organization of Petroleum Exporting Countries. In the
Seventies, OPEC imposed higher prices on the oil market; however,
demand had not increased. While the increased oil prices produced
strong profit margins for producers in the short run, it increased
production costs in all sectors of the economy that relied on oil. This
impacted many elements of the economy are touched by the oil
market, from transportation to construction to plastics, resulting in
inflationary pressure on the prices of goods and services as a result
of OPEC’s decision.
Some causes that sudden increase the cost
a) Rising wages: If trades unions can present a united front then they
can bargain for higher wages. Rising wages are a key cause of cost-
push inflation because wages are the most significant cost for many
firms. (higher wages may also contribute to rising demand)
b) Import prices: So many goods are imported in the India. If there is a
devaluation, then import prices will become more expensive leading
to an increase in inflation. A devaluation/depreciation means the
Rupees is worth less. Therefore, we have to pay more to buy the
same imported goods.
c) Raw material prices: The best example is the price of oil. If the oil
price increase by 20% then this will have a significant impact on
most goods in the economy and this will lead to cost-push inflation.
E.g., in 1974 there was a spike in the price of oil causing a period
of high inflation around the world.

12 | P a g e
d) Profit push inflation: When firms push up prices to get higher rates
of inflation. This is more likely to occur during strong economic
growth.
e) Declining productivity: If firms become less productive and allow
costs to rise, this invariably leads to higher prices.
f) Higher taxes: If the government put up taxes, such as VAT and
Excise duty, this will lead to higher prices, and therefore CPI will
increase. However, these tax rises are likely to be one-off increases.
There is even a measure of inflation (CPI-CT) which ignores the
effect of temporary tax rises/decreases.

13 | P a g e
Effects of Inflation
Inflation has dire socio-economic consequences. As such, inflation has been
taken to be a serious social and economic problem. US Presidents Ford and
Carter have considered inflation as "public enemy number one.
The effects of inflation on the economic system classified into three kinds
• Effects on production, that is changes in the tempo of economic
activity.
• Effects on income distribution, that is, redistribution of income and
wealth.
• Effects on consumption and welfare.
1) Effects on Production: - Moderate rise in prices, that is, a mild
inflation or creeping inflation, as it may be called, has a favourable
effect on production when there are unutilised or underemployed
resources in existence in an economy. Rising prices breed optimistic
expectations within the business community in view of increasing profit
margins, because the price level moves up at a faster rate than the
cost of production. Businessmen are induced to invest more, and as a
result, employment, output and income increase. The tempo of
economic activity starts rising. But there is a limit to it, this limit is set
by the full employment ceiling. Once the full employment stage is
reached in the economy, a further rise in prices will not stimulate
production, employment and real income, due to physical limitations.
Therefore, till the level of full employment is reached, moderately rising
prices, though otherwise harmful, are also beneficial. The beneficial
effect on production, however, is possible only when inflation does not
take place at too fast a rate. A state of running of galloping inflation
creates uncertainty, which is inimical to production. Thus, when
inflation has reached an advanced stage, its brighter aspects
disappear and the evil aspects manifest themselves.
a) Hindrance to capital accumulation: - Capital accumulation is hindered
by uncontrolled inflation, and the savings potentiality of the community
also declines due to the diminishing purchasing power of money.

14 | P a g e
b) Hoarding and black-marketing: - During inflation, when prices are
rapidly rising, the holding of larger stocks of goods becomes very
profitable. Hoarding is encouraged, which further decreases the
available supply of goods in relation to increasing monetary demand.
Eventually, the phenomena of black-marketing and spiralling inflation
develop.
c) Distortion of production pattern. Inflation not only adversely affects the
volume of production but also changes its pattern. Generally,
resources are diverted from the production of essential goods to those
of non-essential because the rich, whose incomes increase more
rapidly. make their demand for luxury goods felt in the market.
Production of undesirable lines is, therefore stimulated and finally
results in the breakdown of the economic system.
d) Disincentive effects due to income tax bracket creep: - During inflation,
with the rise in money incomes of the individuals under progressive
income tax system, the effective tax rate will rise (called Income tax
Bracket Creep'). This may cause a disincentive effect on willingness to
work, save and invest, thus, discouraging productive activity.
2) Distributional Effects: - Inflation redistributes income, because prices
of all factors do not rise in the same proportion. Since the effect of
inflation on the income of different classes of earners varies, there are
serious social consequences. During inflation, the distributive share
accruing to the profiteers increases more than that of wage earners or
fixed-income earners, such as the rentier class. All producers, traders
and speculators gain during an inflation because of the windfall profits
which arise, because prices rise at a faster and higher rate than the
cost of production; wages, interest and rent do not increase rapidly,
and are more or less fixed. Changes in the value of money also cause
redistribution of wealth, partly because, (a) during inflation, there is no
uniform price rise; prices of some types of goods change more than
others, and (b) debts are expressed in terms of money. Inflation is a
sort of hidden tax, steeply regressive in effect. The redistribution of
wealth due to inflation is a burden on those groups of people we are
least able to bear it.

15 | P a g e
A) Debtors and creditors: - Debtors generally gain and creditors lose
during an inflation in accrues to a debtor because he repays loans at a
time when the purchasing power of money lower than when it was
borrowed. The creditor, on the other hand, is a loser during inflation,
since he receives, in effect, less in goods and services than he would
have received in times of low prices.
B) Business community: - Inflation is beneficial for entrepreneurs and
businessmen because they stand to profit by rising prices. They find
that the value of their inventories and stock of goods is rising in money
terms. They also find that prices are rising faster than the costs of
production, so that their profit margin is greatly enhanced. The
business community, therefore, gets supernormal profits during period
of inflation, and those profits continue to increase as long as price rise.
C) Fixed income groups: - Inflation hits wage-earners and salaried people
very hard. Although wage-earners, by the grace of trade unions, can
chase galloping prices, they seldom win the race. Since wages do not
rise at the same rate, and at the same time as the general price level,
the cost of living index rises, and the real income of the wage-earner
decreases. Moreover, in trying to push up wages to sustain their real
income, wage-earners bring about a cost-push inflation, and in the
process worsen their position.
D) Investors: - Those who invest in debentures and fixed-interest bearing
securities, bonds, etc., lose during inflation. However, investors in
equities benefit because more dividend is yielded on account of high
profits made by joint-stock companies during inflation.
E) Farmers: - Farmers usually gain during an inflation, because they can
get better prices for their harvest during inflation.

16 | P a g e
We may conclude that inflation redistributes income and wealth in favour of
businessmen, debtors and farmers but hits consumers, creditors, small
investors, labour class, middle class and fixed-income groups very hard.
Inflation favours one group at the expense of another. Besides, it is always
regressive in effect, that is, it hits hard all those who cannot protect
themselves.
3) Effects on Consumption and Welfare: - Inflation implies an erosion of
the consumer's value of money. It is a form of taxation. Due to
deteriorating purchasing power, the real consumption of the common
people declines. Rising cost of living during inflation implies falling
standard of living and lowering of general economic welfare of the
community at large.

17 | P a g e
Comparison between Inflation and GDP to see its
impact on an economy
We have used CPI inflation rate in below comparison.
Gross domestic product (GDP), Total market value of the goods and
services produced by a country’s economy during a specified period of time.
It includes all final goods and services—that is, those that are produced by
the economic agents located in that country regardless of their ownership
and that are not resold in any form. It is used throughout the world as the
main measure of output and economic activity. Over time, the growth in GDP
causes inflation. This is because, all over the world where inflation is
increasing, people will spend more money because they know that it will be
less valuable in the future. This causes further increases in GDP in the short
term, bringing about further price increases. Also, the effects of inflation are
not linear.
If inflation is indeed detrimental to economic activity and growth, it readily
follows that policymakers should aim at a low rate of inflation. But how low
should inflation be or should it be zero percent? In other words, at what level
of inflation does the relationship between inflation and growth become
negative? The answer to this question, obviously depends upon the nature
and structure of the economy, and will vary from country to country. Recent
studies specifically test for non-linearity in the relationship between inflation
and economic growth. That is, at lower rates of inflation, the relationship is
insignificant or positive, but at higher levels, inflation has a significantly
negative effect on economic growth.

18 | P a g e
There is some relation between Inflation and GDP growth rate.
YEAR GDP growth
rate
Inflation
rate
YEAR GDP growth
rate
Inflation
rate
2001 4.82 3.78 2011 5.24 8.86
2002 3.80 4.30 2012 5.46 9.31
2003 7.86 3.81 2013 6.39 10.91
2004 7.92 3.77 2014 7.41 6.35
2005 7.92 4.25 2015 8.00 5.87
2006 8.06 5.80 2016 8.26 4.94
2007 7.66 6.37 2017 7.04 2.49
2008 3.09 8.35 2018 6.12 4.86
2009 7.86 10.88 2019 5.02 7.66
2010 8.50 11.99
In the above chart, when inflation is average 5% between 2001-06, the GDP
is growing at a rate average 7% but after 2006 inflation start increasing at
the same time GDP start to decrease. In 2008 when global financial market
crashed due to subprime mortgage crisis that fuelled inflation to push at
higher rate till 2010 when global financial market stared recover. After 2010
4.82
3.80
7.86 7.92 7.92 8.06
7.66
3.09
7.86
8.50
5.24 5.46
6.39
7.41
8.00 8.26
7.04
6.12
5.02
3.78
4.30
3.81 3.77
4.25
5.80
6.37
8.35
10.88
11.99
8.86
9.31
10.91
6.35
5.87
4.94
2.49
4.86
7.66
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Relationship between Gdp growrth and Inflation
GDP growth rate Inflation rate

19 | P a g e
India has taken some anti-inflationary measure to control inflation.
Afterwards inflation start decreasing and GDP getting its pace. But in 2017
again inflation comes into action and negatively impact GDP growth till 2019.
So, it can be said that a minimal percent of inflation is good for growth and
in case of India inflation rate 3-5 is good for growth.
Anti-inflationary measures
Anti-inflationary measures involve raising key interest rates, sometimes
dramatically, to cut down the money supply. Other anti-inflationary measures
include things like instituting price controls, changing the peg of a currency,
and outlawing inflation.
1) Monetary Measures: - Monetary policy is the policy employed by the
central bank to alter the cost of credit, de-mand for credit and the
availability of credit. A central bank has some instruments of credit
control measures to influence the demand, cost and availability of
credit or the country’s money supply.
a) Bank Rate
b) Open market Operation
c) Variable Cash Reserve Ratio
d) Credit Control Policy
2) Fiscal Measures: - Fiscal policy measures comprise the policy of the
government relating to taxation, expenditure and borrowing. These
three elements of fiscal policy influence aggregate spending.
Contractionary fiscal policy is recommended during inflation. We know
that the bulk of aggregate spending is derived from government
spending. During inflation, government spending may be reduced.

20 | P a g e
The Stock market refers to the collection of markets and exchanges
where regular activities of buying, selling, and issuance of shares of
publicly-held companies take place. Such financial activities are
conducted through institutionalized formal exchanges. In short Stock
market is market place, where buying and selling of securities are
done.
Stock market shows activity of many large, mid and small companies,
which are registered on stock market. Industries are main pillar of an
economy, so we can deduce that a stock market is an overall picture
of all industries and a good indicator for economic growth. It depicts
the current status of any economy. It somewhere also shows
purchasing power of citizen how efficient companies to higher revenue.
STOCK EXCHANGE
A stock exchange, is a facility where stockbrokers and traders can buy and
sell securities, such as shares of stock, bonds, and other financial
instruments.
In India there are many stock exchanges currently operating.
List of Indian Stock Exchanges
1. Bombay Stock Exchange (BSE)
2. National Stock Exchange (NSE)
3. Calcutta Stock Exchange (CSE)
4. Metropolitan Stock Exchange (MSE)
5. India International Exchange (India INX)
6. NSE IFSC Ltd.
7. Multi Commodity Exchange of India Ltd (MCX)

21 | P a g e
When we talk of Indian stock exchanges, most of the investing population
have heard of only two stock exchanges in India – Bombay stock exchange
(BSE) and National stock exchange (NSE).
1) Bombay Stock Exchange (BSE): - The Bombay Stock Exchange (BSE)
is the first securities market in India and was established in 1875 as
the Native Share and Stock Brokers' Association. Based in Mumbai,
India, the BSE lists close to 6,000 companies and is one of the largest
exchanges in the world. The BSE has helped develop India's capital
markets, including the retail debt market, and has helped grow the
Indian corporate sector. The BSE is Asia's first stock exchange and
also includes an equities trading platform for small-and-medium
enterprises (SME). BSE has diversified into providing other capital
market services including clearing, settlement, and risk management.
2) National Stock Exchange (NSE): - The National Stock Exchange of
India Limited (NSE) is India's largest stock market. Incorporated in
1992, the NSE has developed into a sophisticated, electronic market,
which ranked fourth in the world by equity trading volume. Trading
commenced in 1994 with the launch of the wholesale debt market and
a cash market segment shortly thereafter. The National Stock
Exchange of India Limited was the first exchange in India to provide
modern, fully automated electronic trading. It was set up by a group of
Indian financial institutions with the goal of bringing greater
transparency to the Indian capital market. Today, the National Stock
Exchange of India Limited (NSE) conducts transactions in the
wholesale debt, equity, and derivative markets.

22 | P a g e
Many more exchanges are working, for simplicity we have taken these
two exchanges and see the relationship between inflation rate and major
indices of these exchanges.
These indices are: -
i) BSE Sensex
ii) Nifty 50
iii) Nifty Bank
iv) BSE FMCG
Observation and Analysis
The observation and analysis have been presented index wise. Therefore,
this section shall briefly detail out first, the methodology behind computation
of the different variables discussed and then about the significance of the
particular value with respect to the parameters set.

23 | P a g e
BSE Sensex: - S&P BSE SENSEX, first compiled in 1986, was calculated
on a 'Market Capitalization-Weighted' methodology of 30 component stocks
representing large, well-established and financially sound companies across
key sectors. The base year of S&P BSE SENSEX was taken as 1978-79.
S&P BSE SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is
scientifically designed and is based on globally accepted construction and
review methodology. Since September 1, 2003, S&P BSE SENSEX is being
calculated on a free-float market capitalization methodology. The 'free-float
market capitalization-weighted' methodology is a widely followed index
construction methodology on which majority of global equity indices are
based.
Relation between Inflation and BSE Sensex
So, In-order to find the relationship between Inflation and BSE Sensex and
check reliability of this research.
Test of correlation between Inflation and BSE Sensex
The purpose of using correlation is because the relationship here is of
quantitative in nature and so it an appropriate statistical tool for discovering
and measuring the relationship and expressing it in a comprehensive
manner.

24 | P a g e
Year SENSEEX
%Change
Inflation
rate
2001 -18.25 3.78
2002 3.53 4.30
2003 72.55 3.81
2004 12.43 3.77
2005 41.82 4.25
2006 46.32 5.80
2007 46.71 6.37
2008 -52.54 8.35
2009 79.67 10.88
2010 17.37 11.99
2011 -25.05 8.86
2012 25.05 9.31
2013 8.49 10.91
2014 29.58 6.35
2015 -4.98 5.87
2016 2.01 4.94
2017 27.50 2.49
2018 5.90 4.86
2019 14.08 7.66
There is sufficient evidence to conclude that there is a significant linear
relationship between SENSEX and Inflation because the correlation
coefficient is significantly different from zero.
➢ Standard Deviation of BSE Sensex is high i.e.32.20, that means high
variation in the indices.
➢ Average Return from the indices is approx.17%.
➢ There is slightly negative relationship with inflation.
SENSEX Inflation
Number of
variables
19 19
Mean 17.48 6.55
Standard
deviation
32.2 2.80
COV (X, Y) -2.65
Pearson’s
Correlation
coefficient
-0.03

25 | P a g e
➢ Till 2006 when inflation is below 5%, average growth in Sensex is
approx. 23%.
➢ After 2008, when Sensex is recovering inflation is also at its peak
because of liquidity infusion by govt.
➢ After 2013 inflation start declining and Sensex is growing at slower
pace.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
80.00
100.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Relation between of BSE Sensex with Inflation
%Change Inflation rate

26 | P a g e
Nifty 50: - The NIFTY 50 is the flagship index on the National Stock
Exchange of India Ltd. (NSE). The Index tracks the behaviour of a portfolio
of blue-chip companies, the largest and most liquid Indian securities. It
includes 50 of the approximately 1600 companies listed on the NSE,
captures approximately 65% of its float-adjusted market capitalization and is
a true reflection of the Indian stock market. NIFTY 50 covers major sectors
of the Indian economy and offers investment managers exposure to the
Indian market in one efficient portfolio. The Index has been trading since
April 1996 and is well suited for benchmarking, index funds and index-based
derivatives.
Relation between Inflation and Nifty 50
So, In-order to find the relationship between Inflation and BSE CNX Nifty and
check reliability of this research. But before it is officially released, we need
to conduct the following test-
Test of correlation between Inflation and Nifty 50
manner.

27 | P a g e
relationship between NIFTY 50 and Inflation because the correlation
➢ Standard Deviation of Nifty 50is high i.e.31.61, that means high
➢ There is slightly negative relationship with inflation.
Year NIFTY
50 %
Change
Inflation
rate
2001 -16.1812 3.78
2002 3.272418 4.30
2003 71.88643 3.81
2004 10.64429 3.77
2005 36.3726 4.25
2006 39.81951 5.80
2007 54.77088 6.37
2008 -51.7799 8.35
2009 75.51547 10.88
2010 17.95074 11.99
2011 -25.1423 8.86
2012 27.2596 9.31
2013 6.169949 10.91
2014 30.97663 6.35
2015 -3.94606 5.87
2016 3.115848 4.94
2017 28.26519 2.49
2018 3.141468 4.86
2019 11.8249 7.66
NIFTY 50 Inflation
Number of
variables
19 19
Mean 17.05 6.55
Standard
deviation
31.61 2.80
COV (X, Y) -2.85
Pearson’s
Correlation
coefficient
-0.03

28 | P a g e
➢ Till 2006 when inflation is below 5%, average growth in Sensex is
approx. 23%.
➢ After 2008, when Sensex is recovering inflation is also at its peak
because of liquidity infusion by govt.
➢ After 2013 inflation start declining and Sensex is growing at slower
pace.
There is much more similarity between BSE Sensex and Nifty 50.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
-60
-40
-20
0
20
40
60
80
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Relation between Nifty 50 and Inflation rate
% Change Inflation rate

29 | P a g e
Nifty Bank: - Nifty Bank, or Bank Nifty, is an index comprised of the most
liquid and large capitalised Indian banking stocks. It provides investors with
a benchmark that captures the capital market performance of Indian bank
stocks. The index has 12 stocks from the banking sector.
Relation between Inflation and Bank Nifty
So, In-order to find the relationship between Inflation and Bank Nifty and
to conduct the following test-
Test of correlation between Inflation and Bank Nifty
manner.

30 | P a g e
relationship between BANK NIFTY and Inflation because the correlation
➢ Standard Deviation of BSE Sensex is high i.e.39.70, that means high
➢ There is negative relationship with inflation.
Year BANK
NIFTY
%Change
Inflation
rate
2001 -11.18 3.78
2002 40.94 4.30
2003 111.96 3.81
2004 31.23 3.77
2005 25.92 4.25
2006 31.57 5.80
2007 63.98 6.37
2008 -49.07 8.35
2009 79.90 10.88
2010 30.55 11.99
2011 -32.94 8.86
2012 55.74 9.31
2013 -9.28 10.91
2014 64.08 6.35
2015 -9.64 5.87
2016 7.35 4.94
2017 40.00 2.49
2018 6.24 4.86
2019 18.11 7.66
BANK
NIFTY
Inflation
Number of
variables
19 19
Mean 26.08 6.55
Standard
deviation
39.70 2.80
COV (X, Y) -13.77
Pearson’s
Correlation
coefficient
-0.13

31 | P a g e
Inflation has major impact on banking and Finance sector because
govt control inflation with the help of Banking and Financial institution
by controlling monetary measure.
➢ When inflation is below approx. 5 percent then Banking sector
growing rapidly.
➢ When inflation is rising, banking sector negatively impacted than
other.
➢ Inflation has inverse relation with bank nifty.
➢ Low inflation is good for banking growth.
As a result of an increase in the Inflation rate, the interest rates go up, which
results in decrease in the value of bonds, equities and debt. This fall in the
prices of the bonds leads to capital losses for bondholders like banks and
mutual funds. Therefore, rising interest rates usually are negative for banks.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Comparison between Bank Nifty and Inflation

32 | P a g e
BSE FMCG: - The BSE FMCG Index is designed to provide investors with
a benchmark that reflects companies included in the BSE All Cap which are
classified as members of the FMCG sector.
Relation between Inflation and BSE FMCG
So, In-order to find the relationship between Inflation and BSE FMCG and
to conduct the following test.
Test of correlation between Inflation and BSE FMCG
manner.

33 | P a g e
relationship between BSE FMCG and Inflation because the correlation
➢ Standard Deviation of BSE FMCG is i.e.20.62, that means slightly less
variation than other indices.
➢ There is positive relationship with inflation.
Year BSE
FMCG
%change
Inflation
rate
2001 -10.5604 3.78
2002 -11.6489 4.30
2003 35.3976 3.81
2004 -4.5801 3.77
2005 55.57287 4.25
2006 17.40244 5.80
2007 19.94396 6.37
2008 -14.3341 8.35
2009 40.46383 10.88
2010 31.97399 11.99
2011 9.532534 8.86
2012 46.61129 9.31
2013 11.0001 10.91
2014 18.26646 6.35
2015 1.355296 5.87
2016 3.290721 4.94
2017 31.53795 2.49
2018 10.60188 4.86
2019 -3.57754 7.66
BSE FMCG Inflation
Number of
variables
19 19
Mean 15.17 6.55
Standard
deviation
20.62 2.80
COV (X, Y) 9.87
Pearson’s
Correlation
coefficient
0.18

34 | P a g e
➢ FMCG sector is slightly positive relation with inflation.
➢ FMCG is consider to be ever green sector because of it include daily
usage goods.
➢ Demand for FMCG goods are remain constant or increasing that keeps
the sector growing whether inflation is high or low.
➢ Inflation give boost to FMCG revenue.
Increase in Inflation causes reduction in purchasing power usually has a
positive impact on the consumer-driven stocks such as FMCG and consumer
durables. It gives opportunity the companies to hike their prices but cost
factor of production is not increase at same rate which in turn leads to higher
profits (in monetary term only).
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
-20
-10
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Comparion BSE FMCG with Inflation

35 | P a g e
FINAL OBSERVATION AND CONCLUSION
So, on the basis of the result of both the test i.e. Test of Correlation and
Graphical Presentation conducted above, we could make out that- The
correlation coefficient of Inflation with major stock indices is sometimes
positively or sometimes Negative. This show the degree of association
between Inflation and Various Stock Market Indices is very uncertain and
random and hence stock market return cannot be predicted. This shows that
inflation can be used to explain the variation in the movement of the the stock
market and hence Indian Stock Market can be affected by the change in the
inflation rate in Indian economy.

36 | P a g e
Reference
➢ Managerial Economics by D.M. Mithani
➢ An Outline Of Micro Economic Theory And Indian
Economic Environment By Ajoy Kumar Nandi
➢ I Do What I Do by Raghuram G Rajan
➢ https://www.worldbank.org
➢ https://www.rbi.org.in
➢ https://www.investopedia.com
➢ https://www.nseindia.com
➢ https://www.bseindia.com/index.html
➢ https://www.moneycontrol.com/stocks/histstock.php
➢ https://www.researchgate.net/

Inflation and its impact

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

Similaire à Inflation and its impact

Similaire à Inflation and its impact (20)

Dernier

Dernier (20)

Inflation and its impact