Project report on Relationship Of Inflation with Indian Stock Market

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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, BSE BANKEX, BANK NIFTY, BSE Consumer

Durables, and BSE FMCG.

In my 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.

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Table of Content Title of Chapter page no.

Acknowledgement…………………………………………..5 Inflation: An Introduction…………………………………...6 Causes of Inflation…………………………………………..6-7 Cost of Inflation……………………………………………..7-8 How inflation is Measured…………………………………..8-9 Inflation in India……………………………………………..10-12

Issue Optimal Inflation Rate Money Supply and Inflation Global trade

Factors………………………………………………………12-14 Demand factors Supply factors Domestic factors External factors Value

What is Stock Market……………………………………….15 Types of Stock Market in India…………………………….. BSE: Bombay Stock Exchange……………………………..16 NSE: National Stock Exchange……………………………..17 What are the effect of inflation on an economy……………..17-18 How does Inflation affect Stock Market …………………….18 How are companies affected by inflation and how does investor view the

impact……………………………………………………….18 Literature Review………………………………………….19-20 Research Objective………………………………………...21 Research Methodology…………………………………….22 Hypothesis………………………………………………….23-24 Observation…………………………………………………25-48

Relation between inflation with BSE Sensex, CNX Nifty, BSE Bankex, Bank Nifty, BSE Consumer Durables, BSE FMCG

Conclusion………………………………………………….49-50 Limitation of study………………………………………….51 Bibliography………………………………………………..52

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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, I would like to thank my teacher of Finance, Ms. Kangan Jain, for her unwavering

guidance and help in completing this research project. Her suggestions and support to

improve my research methodology was valuable for the completion of this project

successfully. I am also very thankful to all the people who answered my questions willingly

and participated in my research for giving me their precious time. Also, I wish to thank all

those authors whose journals I referred to and websites like Wikipedia and Investopedia in

order to provide valuable information to complete my project. Finally, I thank my fellow

students who helped me wherever I needed help, and enabled me to complete my project on

time.

Rohit Kumar

2063

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INTRODUCTION

INFLATION

It is defined as the rise in the general price level and fall in the money value

It occurs when the amount of buying power is more than the output of goods and services.

It also occurs when the amount of money exceeds the amount of goods and services available

TYPES OF INFLATION

1) Creeping inflation

2) Trotting inflation

3) Galloping inflation

4) Hyper inflation

CREEPING INFLATION- when there is general rise in prices at very low rates, which is 2-

4% annually

TROTTING INFLATION- when there is rise in price to almost 5%

GALLOPING INFLATION- when rate is increased with a noticeable speed and at a

remarkable rate usually from 10-20%

HYPER INFLATION-when the inflation rate rise to over 20%

CAUSES OF INFLATION

DEMAND-PULL INFLATION:-

Occurs when the consumers, businesses and the governments’ demand for goods and services

more than the supply; therefore the cost of item rises unless the supply is perfectly elastic

The increase in demand is created from in increase in other areas, such as the supply of

money, the increase of wage which would then give rise in disposable income, and once the

consumer have more disposal income this would lead to aggregate spending

As a result in aggregate spending there would also be an increase in demand for exports and

possible hoarding and profiteering from producers. The excessive demand, the price of final

goods and services would be forced to increase and this increase give rise to inflation

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COST-PUSH INFLATION

Cost push inflation is caused by an increase in production costs. It is generally caused by an

increase in wages or an increase in the profit margin of the entrepreneurs

MONETARY INFLATION

Monetary inflation occur when there is an excessive supply of money. It is understood that

the government increase the money supply faster than the quantity of goods increase, which

result in inflation. Interestingly as the supply of good increase the money supplyhas to

increase or else price actually go down

STRUCTURAL INFLATION

Planned inflation that is caused by government’s monetary policy is called structural

inflation. This type of inflation is not caused by the excess of demand or supply but is built

into an economy due to governments’ monetary policy.

In developed countries they are characterized by a lack of adequate resources like capital,

foreign exchange, land and infrastructure. Furthermore, over-population with the majority

depending on agriculture for livelihood means that there is a fragmentation of landholdings.

There are other institutional factors like land-ownership, technological backwardness and low

rate of investment in agriculture.

IMPORTED INFLATION

Another type of inflation is imported inflation. This occur when the inflation of goods and

services from foreign countries that are experiencing inflation are imported and the increase

in prices for that imported goods or services will directly affect the cost of living.

COSTS OF INFLATION Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects

different people in different ways. It also depends on whether inflation is anticipated

or unanticipated. If the inflation rate corresponds to what the majority of people are

expecting (anticipated inflation), then we can compensate and the cost isn't high. For

example, banks can vary their interest rates and workers can negotiate contracts that

include automatic wage hikes as the price level goes up.

Problems arise when there is unanticipated inflation:

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Creditors lose and debtors gain if the lender does not anticipate inflation

correctly. For those who borrow, this is similar to getting an interest-free loan.

Uncertainty about what will happen next makes corporations and consumers

less likely to spend. This hurts economic output in the long run.

People living off a fixed-income, such as retirees, see a decline in their

purchasing power and, consequently, their standard of living.

The entire economy must absorb repricing costs ("menu costs") as price lists,

labels, menus and more have to be updated.

If the inflation rate is greater than that of other countries, domestic products

become less competitive.

People like to complain about prices going up, but they often ignore the fact that

wages should be rising as well. The question shouldn't be whether inflation is rising,

but whether it's rising at a quicker pace than your wages.

Finally, inflation is a sign that an economy is growing. In some situations, little

inflation (or even deflation) can be just as bad as high inflation. The lack of inflation

may be an indication that the economy is weakening. As you can see, it's not so easy

to label inflation as either good or bad - it depends on the overall economy as well as

your personal situation.

HOW IN FLATION IS MEASURED?

Measuring inflation is a difficult problem for government statisticians. To do this, a

number of goods that are representative of the economy are put together into what is

referred to as a "market basket." The cost of this basket is then compared over time.

This results in a price index, which is the cost of the market basket today as a

percentage of the cost of that identical basket in the starting year.

In North America, there are two main price indexes that measure inflation:

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Consumer Price Index (CPI) - A measure of price changes in consumer goods

and services such as gasoline, food, clothing and automobiles. The CPI

measures price change from the perspective of the purchaser. CPI data can be

found at the Bureau of Labor Statistics.

Wholesale price index (WPI)- The Wholesale Price Index (WPI) is the price of a

representative basket of wholesale goods. Some countries ( like the Philippines) use

WPI changes as a central measure of inflation.But now India has adopted new CPI to

measure inflation. However, United States now report a producer price index instead.

Producer Price Indexes (PPI) - A family of indexes that measure the average

change over time in selling prices by domestic producers of goods and services.

PPIs measure price change from the perspective of the seller. U.S. PPI data can

be found at the Bureau of Labor Statistics.

You can think of price indexes as large surveys. Each month, the U.S. Bureau of

Labor Statistics contacts thousands of retail stores, service establishments, rental units

and doctors' offices to obtain price information on thousands of items used to track

and measure price changes in the CPI. They record the prices of about 80,000 items

each month, which represent a scientifically selected sample of the prices paid by

consumers for the goods and services purchased.

In the long run, the various PPIs and the CPI show a similar rate of inflation. This is

not the case in the short run, as PPIs often increase before the CPI. In general,

investors follow the CPI more than the PPIs.

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INFLATION IN INDIA

The annualized inflation rate in India is 5.37% as of February 2015, as per the Indian ministry

of statistics and programme implementation. This represents a modest reduction from the

previous annual figure of 9.6% for June 2011. Inflation rates in India are usually quoted as

changes in the Wholesale Price Index, for all commodities.

Many developing countries use changes in the Consumer Price Index (CPI) as their central

measure of inflation. India used WPI as the measure for inflation but new CPI(combined) is

declared as the new standard for measuring inflation ( April 2014) [[1]] CPI numbers are

typically measured monthly, and with a significant lag, making them unsuitable for policy

use. Instead, India uses changes in the Wholesale Price Index (WPI) to measure its rate of

inflation.

Provisional annual inflation rate based on all India general CPI (Combined) for November

2013 on point to point basis (November 2013 over November 2012) is 11.24% as compared

to 10.17% (final) for the previous month of October 2013. The corresponding provisional

inflation rates for rural and urban areas for November 2013 are 11.74% and 10.53%

respectively. Inflation rates (final) for rural and urban areas for October 2013 are 10.19% and

10.20% respectively.

The WPI measures the price of a representative basket of wholesale goods. In India, this

basket is composed of three groups: Primary Articles (20.1% of total weight), Fuel and Power

(14.9%) and Manufactured Products (65%). Food Articles from the Primary Articles Group

account for 14.3% of the total weight. The most important components of the Manufactured

Products Group are Chemicals and Chemical products (12%); Basic Metals, Alloys and

Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and

Transport, Equipment and Parts (5.2%).

WPI numbers are typically measured weekly by the Ministry of Commerce and Industry.

This makes it more timely than the lagging and infrequent CPI statistic.

ISSUE

The challenges in developing economy are many, especially when in context of the monetary

policy with the Central Bank, the inflation and price stability phenomenon. There has been a

universal argument these days when monetary policy is determined to be a key element in

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depicting and controlling inflation. The Central Bank works on the objective to control and

have a stable price for commodities. A good environment of price stability happens to create

saving mobilization and a sustained economic growth. The former Governor of RBI C.

Rangarajan points out that there is a long-term trade-off between outputand inflation. He adds

on that short-term trade-off happens to only introduce uncertainty about the price level in

future. There is an agreement that the central banks have aimed to introduce the target of

price stability while an argument supports it for what that means in practice.

THE OPTIMAL INFLATION RATE

It arises as the basis theme in deciding an adequate monetary policy. There are two debatable

proportions for an effective inflation, whether it should be in the range of 1-3 per-cent as the

inflation rate that persists in the industrialized economy or should it be in the range of 6-7

per-cents. While deciding on the elaborate inflation rate certain problems occur regarding its

measurement. The measurement bias has often calculated an inflation rate that is

comparatively more than in nature. Secondly, there often arises a problem when the quality

improvements in the product are in need to be captured out, hence it affects the price index.

The consumer preference for a cheaper goods affects the consumption basket at costs, for the

increased expenditure on the cheaper goods takes time for the increased weight and

measuring inflation. The Boskin Commission has measured 1.1 per cent of the increased

inflation in USA every-annum. The commission points out for the developed countries

comprehensive study on inflation to be fairly low.

MONEY SUPPLY AND INFLATION

The Quantitative Easing by the central banks with the effect of an increased money supply in

an economy often helps to increase or moderate inflationary targets. There is a puzzle

formation between low-rate of inflation and a high growth of money supply. When the

current rate of inflation is low, a high worth of money supply warrants the tightening of

liquidity and an increased interest rate for a moderate aggregate demand and the avoidance of

any potential problems. Further, in case of a low output a tightened monetary policy would

affect the production in a much more severe manner. The supply shocks have known to play

a dominant role in the regard of monetary policy. The bumper harvest in 1998-99 with a

buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further

driving their prices from what were they in the last year. The increased import competition

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since 1991 with the trade liberalization in place have widely contributed to the reduced

manufacturing competition with a cheaper agricultural raw materials and the fabric industry.

These cost-saving driven technologies have often helped to drive a low-inflation rate. The

normal growth cycles accompanied with the international price pressures has several times

being characterized by domestic uncertainties.

GLOBAL TRADE

Inflation in India generally occurs as a consequence of global traded commodities and the

several efforts made by The Reserve Bank of India to weaken rupee against dollar. This was

done after the Pokhran Blasts in 1998.[4] This has been regarded as the root cause

of inflationcrisis rather than the domestic inflation. According to some experts the policy of

RBI to absorb all dollars coming into the Indian Economy contributes to the appreciation of

the rupee.[5] When the US dollar has shrieked by a margin of 30%, RBI had made a massive

injection of dollar in the economy make it highly liquid and this further triggered

offinflation in non-traded goods. The RBI picture clearly portrays forsubsidizing exports with

a weak dollar-exchange rate.All these account for a dangerous inflationary policies being

followed by the central bankof the country.[6] Further, on account of cheap products

being importedin the country which are made on a high technological and capital intensive

techniques happen to either increase the price of domestic raw materials in the global market

or they are forced to sell at a cheaper price, hence fetching heavy losses.

FACTORS

There are several factors which help to determine the inflationary impact in the country and

further help in making a comparative analysis of the policies for the same.The major

determinant of the inflation in regard to the employment generation and growth is depicted by

the Phillips curve.

DEMAND FACTORS

It basically occurs in a situation when the aggregate demand in the economy has exceeded the

aggregate supply. It could further be described as a situation where too much money chases

just few goods. A country has a capacity of producing just 550 units of a commodity but the

actual demand in the country is 700 units. Hence, as a result of which due to scarcity in

supply the prices of the commodity rises. This has generally been seen in India in context

with the agrarian society where due to droughts and floods or inadequate methods for the

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storage of grains leads to lesser or deteriorated output hence increasing the prices for the

commodities as the demand remains the same.

SUPPLY FACTORS

The supply side inflation is a key ingredient for the rising inflation in India. The agricultural

scarcity or the damage in transit creates a scarcity causing high inflationary pressures.

Similarly, the high cost of labor eventually increases the production cost and leads to a high

price for the commodity.The energies issues regarding the cost of production often increases

the value of the final output produced. These supply driven factors have basically have

a fiscal tool for regulation and moderation. Further, the global level impacts of price rise

often impactsinflation from the supply side of the economy.

Consensus on the prime reason for the sticky and stubbornly highConsumer Price Index, that

is retail inflation of India, is due to supply side constraints; and still where interest rate

remains the only tool with The Reserve Bank of India.[7] Higher inflation rate also constraints

India's manufacturing environment.

DOMESTIC FACTORS

Developing economies like India have generally a lesser developed financial market which

creates a weak bonding between the interest rates and the aggregate demand. This accounts

for the real money gap that could be determined as the potential determinant for the price rise

and inflation in India. There is a gap in India for both the output and the real money gap. The

supply of money grows rapidly while the supply of goods takes due time which causes

increased inflation. SimilarlyHoarding has been a problem of major concern in India where

onions prices have shot high in the sky. There are several other stances for the gold and

silver commodities and their price hike.[9]

EXTERNAL FACTORS

The exchange rate determination is an important component for the inflationary pressures that

arises in the India. The liberal economic perspective in India affects the domestic markets. As

the prices inUnited States Of America rises it impacts India where the commodities are now

imported at a higher price impacting the price rise. Hence, the nominal exchange rate and the

import inflation are a measures that depict the competitiveness and challenges for the

economy.[10]

VALUE

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The inflation rate in India was recorded at 6.1% (WPI) in August 2013. Historically, from

1969 until 2013, the inflation rate in India averaged 7.7% reaching an all time high of 34.7%

in September 1974 and a record low of -11.3% in May 1976.

The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This breaks down

into a rate 7.3% for Food, 9.6% for Non-Food Agriculturals, and 26.6% for Mining Products.

The inflation rate for Fuel and Power is at 14.0%. Finally, the inflation rate for Manufactured

Articles is currently at 7.3%.[11]

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WHAT IS STOCK MARKET??

A stock market is place or public entity for buying and selling of company shares and

derivatives at an agreed price. These shares and derivatives are listed in stock exchange for

trade.

TYPES OF MARKET IN INDIA

Primarily there are two types of market in India

1) Primary market

2) Secondary market

Primary market- it is the market where stock is issued for the first time. So, when the

company is listed in stock exchange first and issues its shares- this process is happened in

primary market.

Secondary market- These is the market where the already issued stock has traded by the small

investor, AMC and HNI’s through the licensed share broker. After IPO in primary market the

trading has been done in secondary market.

SNO. NAME OF STOCK EXCHANGE ADDRESS

1 Ahemdabad Stock Exchange Ltd Kamdhenu Complex Opp, Sahajanand College,

Panjarapole, Ambawadi, Ahmedabad - 380001

2 Bse Ltd P J Tower, Dalal Street, Mumbai 400023

3 Calcutta Stock Exchange Ltd 7, Lyons Range, Kolkata – 700001

4 Delhi Stock Exchange Ltd Dse House, 3/1, Asaf Ali Road, New Delhi - 110002

5 Jaipur Stock Exchange

6 MCX- Stock Exchange Ltd 4th Floor, Vibgyor Tower, Plot No C 62, G Block, Bandra

Kurla Complex (BKC), Bandra (E), Mumbai - 400051

7 Madhya Pradesh Stock Exchange Ltd Palika Plaza, Phase II, 201, 2nd Floor, MTH Compound,

Indore – 452001

8 Madras Stock Exchange Ltd P O Box No 183, New No: 30 (Old No: 11) Second Line

Beach, Chennai – 600001

9 Magadh Stock Exchange Ltd

10 National Stock Exchange Of India Ltd Bandra Kurla Complex, Bandra (East) Mumbai 400051

11 OTC Exchange Ltd. 92, Maker Towers 'F', Cuffe Parade, Mumbai - 400005

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12 Pune Stock Exchange Ltd Shivleela Chambers, 752, Sadashiv Peth, Rb Kumthekar

Marg Pune – 411030

13 The Vadodara Stock Exchange Ltd Fortune Tower, Sayajigunj, Vadodara - 390005

14 U.P. Stock Exchange Ltd Padam Towers, 14/113, Civil Lines, Kanpur - 208001

15 United Stock Exchange Of India Ltd Office No 3 To 6, 7th Floor, Arcadia Building,

195,N.C.P.A Marg, Nariman Point, Mumbai-400021

Some stock exchanges have been granted exit by sebi. These stock exchanges and their date of exits

are:

SNO. NAME OF STOCK EXCHANGE DATE OF EXIT

1 Hyderabad Stock Exchange 25 jan,2013

2 Coimbatore Stock Exchange Ltd 3 april,2013

3 Saurashtra Kutch Stock Exchange Ltd 5 april,2013

4 Mangalore Stock Exchange 3 march,2014

5 Inter-Connected Stock Exchange Of India Ltd 8 december,2014

6 Cochin Stock Exchange Ltd 23 december,2014

7 Bangalore Stock Exchange Ltd 26 december,2014

8 Ludhiana Stock Exchange Ltd 30 december,2014

9 Gauhati Stock Exchange Ltd 27 january,2015

10 Bhubaneswar Stock Exchange Ltd 9 february, 2015

Two main stock exchanges in are:

1) BSE: Bombay stock exchange and

2) NSE National stock exchange

BSE: THE BOMBAY STOCK EXCHANGE

it is one of the largest stock exchange in with more than 6000 stocks listed

it account for two third of the total trading volume in the country.

Established in 1875 and one of the oldest stock exchange in asia.

It was the first one to be recognized by the government of india among the 22

exchanges.

Only stock exchange that had the advantage of getting permanent recognition.

CEO- Ashish Chauhan

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It possess the maximum number of listed organization in the world.

Index of BSE is known as SENSEX which include 30 companies.

SENSEX has been calculated since 1986 and initially it was calculated on the total

market capitalization methodology. This methodology was changed in 2003 to free float

market capitalization.

SENSEX is calculated for every 15 second

NSE: NATIONAL STOCK EXCHANGE

It was promoted by leading financial institution at the order of government of india.

In November,1992 NSE was formed as a tax paying company.

It was recognized as a stock exchange in april 1993 under the security

contract(regulation) act,1956

Started its operation in june 1994

It commenced its capital market segment started in November 1994, while derivative

segment started in june 2000.

What are the effects of Inflation on an economy?

Inflation has both Negative and Positive points which are as follows.

Negative

• Add inefficiencies in the market, and make it difficult for companies to budget or plan long-

term

• Can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax

rates.

• Cost-push inflation - Rising inflation can prompt employees to demand higher wages, to

keep up

with consumer prices. Rising wages in turn can help fuel inflation.

• Hoarding - People buy consumer durables as stores of wealth in the absence of viable

alternatives

as a means of getting rid of excess cash before it is devalued, creating shortages of the

hoarded

objects.

• Hyperinflation - If inflation gets totally out of control (in the upward direction), it can

grossly interfere

with the normal workings of the economy, hurting its ability to supply.

• Price inflation has immense effect on the Time Value of Money (TVM)- The above two

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examples

explains the meaning of this statement.

Positive

• Labor-0market adjustments - Inflation would lower the real wage if nominal wages are kept

constant,

Keynesians argue that some inflation is good for the economy, as it would allow labor

markets to

reach equilibrium faster.

• Debt relief - Debtors who have debts with a fixed nominal rate of interest will see a

reduction in

the "real" interest rate as the inflation rate rises

How does rising inflation affect the stock market? To tame inflation, the government usually hikes interest rates. This tends to make debt

instruments attractive relative to equities as the former carry a lower risk (small savings

instruments are risk free as they are guaranteed by the government). This results in some

amount of investments shifting from equity to debt.However, high inflation is not always bad

and low inflation need not always be good for equity markets, as the impact will differ for

companies and sectors across different time horizons. The first thing to consider is the items

where prices are rising. For example a rise in oil prices will impact a wide range of items

from food products to those that require transportation.

How are companies affected by rising inflation and how does an investor

view the impact? A rise in prices of several items means that the input prices for production of various goods

and services are rising. In these cases market analysts and fund managers will always

consider the net impact on the margin of the entity that they are tracking.

While there might be an increase in the input prices, it has to be considered in the backdrop

of the company's ability to pass on the price hike to the end-user. If a company is able to

sustain its profit margin despite high inflation, the stock price is likely to hold. If the high

inflation sustains, at some stage it will lead to a chain reaction across the economy, pushing

up interest rates and even affecting demand. An increase in interest rates will push up

borrowing costs for corporates while lower demand will hurt growth in revenues. This is

likely to impact sentiment for the stock market as a whole.

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LITERATURE REVIEW

Saurabh Singh, Dr. L.K. tripathy, Kirti Lalwani has done their research on “AN IMPIRICAL

STUDY OF IMPACT OF EXCHANGE RATE & INFLATION RATE ON

PERFORMANCE OF BSE SENSEX”. In their research paper they tries to examine the

primary factors responsible for affecting Bombay Stock Exchange in India. They attempt to

investigate the relative influence of the factor affecting BSE and thereby categorized them.

Douglason G. Omotor has done his research on “RELATIONSHIP BETWEEN

INFLATIOIN AND STOCK MARKET RETURNS” in the context with Nigeria. In his

research Douglason tries to find out the relation of Inflation and stock market in Nigeria. His

research suggest that stock market returns may provide an effective hedge against in Nigeria.

Prof. Lawrence H. Summers has done his research on “INFLATION, THE STOCK

MARKET AND OWNER OCCUPIED HOUSING”. In his research he explained the sharp

decline in the value of the stock market and increase in the price of the owner occupied

housing over the last decade, both of these were result from the interaction of increase in the

expected inflation and US tax system. The result in his research paper indicates that tax

effects are large enough to account for almost the entire relative price shift which has been

observed. His research paper suggest that to a large extent, the increase in the value of

housing, and decrease in the value of corporate capital may have a common explanation, the

interaction of inflation and a non-indexed tax system. The acceleration of inflation has

sharply increased the rate of taxation of corporate capital income, while reducing the

effective taxation of owner occupied housing.

K.R. Shanmugam and Biswa Swarup Mishra has done his research on “STOCK RETURN-

INFLATION IN INDIA”. His study contributes to the stock return-inflation relation literature

in developing countries by revisiting the issue with reference to the emerging economy,

India. More specifically it test whether the Indian stock market provide an effective hedge

against inflation using monthly data on real stock return, inflation and real activity from april

1980 to march 2004 and two step estimation procedure. The result of his study indicate that

(i) the indian stock market reflect the future real activity; (ii) this negative stock inflation

relation emerges from the unexpected component of the inflation and (iii) this negative

relation vanishes when we control for the inflation-real activity relation, thereby support for

Fama’s proxy effect hypothesis.

20

Geert Bekaert and Eric Engstrom has done their research on “INFALTION AND THE

STOCK MARKET:UNDERSTANDING THE ‘FED MODEL’”. The fed model postulate

that the dividend or earning yield on stock equal the yield on nominal treasury bonds, or at

least dividend the two should be highly correlated. They shows that the effect is consistent

with modern asset pricing theory incorporating uncertainty about the real growth prospects

and also habit based risk aversion .

Michael D. Bordo, Michael J. Dueker and David C. Wheelock has done their research on

“INFALTION, MONETARY POLICY AND STOCK MARKET CONDITIONS” His

research papers examines the association between inflation monetary policy and US stock

market condition during the second half of the 20th century. They use latent variable VAR to

estimate the impact of inflation and other macroeconomics shocks on a latent index of stock

market conditions. They investigate the extent to which various shocks contribute to change

in the market conditions, above and beyond their direct effect on real stock price.

21

RESEARCH OBJECTIVE

The overall objectives in this study are to re-examine the relationship between

inflation and the Indian Stock Market.

The specific objectives of the study are to examine whether expected and

unexpected inflation has significant relationship and influence to Indian stock

market of in the short run and long run for India.

It is well known fact that inflation has impact on stock returns and stock market.

This research identifies that either Inflation has positive or negative relation

with Indian Stock Market.

22

RESEARCH METHODOLOGY

The objective of this research is to find out the relationship between Inflation Rate and Indian Stock Market because Inflation Rate has a considerable influence on on Stock Market. To find out the relation we select six indices (BSE Sensex, NSE Nifty, BSE Bankex, Bank Nifty, BSE Consumer Durables and BSE FMCG). Sensex and Nifty are the major stock indices of India, if inflation rate affect these stock indices than it affect whole stock market.

The yearly data of Inflation is available from 1958 but data of Sensex and Nifty are not available for that much longer duration. The inflation data is based on Consumer Price Index (CPI) and data of all indices is taken on closing date of 31 December every year.

Inflation data is taken from www.Inflation.eu

Data of Stock Indices is taken from BSE (www.bseindia.com), NSE (www.nseindia.com) and Moneycontrol (www.moneycontrol.com)

The purpose is to check here the degree of association between Inflation and all the indices mentioned here as to know what kind of relationship exist between and so correlation analysis is used as it is an appropriate statistical tool for discovering and measuring the relationship between Inflation and Indian Stock Market

After using correlation analysis, an attempt will be made to find whether we can use the value of inflation to predict the value of unknown variable which in our case will be the all six indices used in this research for study. So, here we need to find out what level of variation in the value of these variables can be explained by a given change in Inflation and the appropriate tool for it is regression which show the average change in the value of the dependent variable for a given value of the independent variable.

On obtaining the result through the test done, the significance value was noted, and the observations were duly noted. In later sections, these observations are then analyzed and finally the conclusions are drawn on the evidence available and test done on the data gathered.

23

HYPOTHESIS

As explained in this research methodology, the data has been taken serial wise wherein

inflation is compared against the various indexes to know the nature of relationship between

them

The hypothesis thus stated would be regarding the effectiveness of inflation in our country to

Indian Stock Market. For checking this relationship various stock indexes are selected these

are:-

1) BSE Sensex

2) NSE Nifty

3) BSE Bankex

4) Bank Nifty

5) BSE Consumer Durables

6) BSE FMCG

The reason why we have chosen these variables is because Sensex and Nifty are the major

stock indices used to track Stock Market and Stock Prices, Bankex and Bank Nifty are the

indices to track the performance of banking sector. BSE Consumer Durables is used to track

consumer durables product and BSE FMCG is used to track the performance of FMCG sector

1. Hypothesis- (Yearly Data of Inflation and BSE Sensex)

Ho(Null Hypothesis)-Performance of BSE SENSEX does not depend on performance of

inflation rate

H1(Alternate Hypothesis)- performance of BSE SENSEX depends on performance of

inflation rate

2. Hypothesis- (Yearly Data of Inflation and NSE Nifty)

Ho(Null Hypothesis)- performance of NIFTY does not depends on performance of

Inflation rate.

H1(Alternate Hypothesis)- performance of NIFTY depends on performance of Inflation

rate

24

3. Hypothesis- (Yearly Data of Inflation and BSE Bankex)

Ho(Null Hypothesis) – Performance of BSE Bankex does not depend on the

performance of Inflation Rate.

H1(Alternate Hypothesis)- Performance of BSE Bankex depend on the performance of

Inflation.

4. Hypothesis- (Yearly Data of Inflation and Bank Nifty)

Ho(null Hypothesis)- Performance of Bank Nifty does not depend on the performance of

Inflation Rate.

H1(Alternate Hypothesis)- Performance of Bank Nifty depend on the performance of

Inflation Rate.

5. Hypothesis- (Yearly Data of Inflation and BSE Consumer Durables)

Ho(Null Hypothesis)- Performance of BSE Consumer Durables does not depend on the


H1(Alternate Hypothesis)-Performance of BSE Consumer Durables depend on


6. Hypothesis- (Yearly Data of Inflation and BSE FMCG)

Ho(Null Hypothesis)- Performance of BSE FMCG does not depend on the performance

of Inflation Rate.

H1(alternate Hypothesis)- Performance of BSE FMCG depend on the performance of

Inflation Rate.

25

Observation and Analysis

The observation and analysis has been presented index wise. Therefore, this section shall

briefly details out first on the methodology behind computation of the various variables

discussed and then about the significance of the particular value with respect to the

parameters set.

Relation between Inflation and BSE Sensex

So, In-order to find the relationship between Inflation and BSE Sensex 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 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.

Test of Regression of Inflation on BSE Sensex

The purpose of using regression is to analyze how much “change in BSE Sensex” is

responsible for a given change in Inflation. The purpose of regression is to estimate the value

of unknown variable from the known value of other variable. In our case the known variable

is Inflation and unknown variable is BSE Sensex.

26

Correlation between Inflation and BSE Sensex

Descriptive Statistics

Mean Std. Deviation N

Inflation_Rate 6.9160 3.33938 15

BSE_Sensex 13179.8767 7742.37221 15

Correlations

Inflation_Rate BSE_Sensex

Inflation_Rate

Pearson Correlation 1 .541*

Sig. (2-tailed) .037

N 15 15

BSE_Sensex

Pearson Correlation .541* 1


N 15 15

*. Correlation is significant at the 0.05 level (2-tailed).

Observations

The level of significance is 0.037 which is less than 5% and so we can say that the

level of correlation between inflation and BSE Sensex is significant and also the

Pearson Correlation value of “0.541” shows that there is a strong degree of positive

correlation between Inflation and BSE Sensex

There is a positive correlation between them, it signifies increase in inflation rate

always give positive impact on BSE Sensex

27

Regression between inflation and BSE Sensex

Variables Entered/Removeda

Model Variables

Entered

Variables

Removed

Method

1 Inflation_Rateb . Enter

a. Dependent Variable: BSE_Sensex

b. All requested variables entered.

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .541a .293 .239 6754.78031

a. Predictors: (Constant), Inflation_Rate

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 246068843.705 1 246068843.705 5.393 .037b

Residual 593151741.429 13 45627057.033

Total 839220585.134 14


b. Predictors: (Constant), Inflation_Rate

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) 4497.196 4125.617 1.090 .295

Inflation_Rate 1255.448 540.607 .541 2.322 .037


Observation

Regression equation is as follows

BSE Sensex=4497+1255.448(Inflation Rate)

Inflation Rate is Independent Variable

BSE Sensex

And 4497.196 is the intercept



BSE Sensex




BSE Sensex


And now coming to the analysis part, the level of significance 0.037 which is less

than 5% significance level

value of “0.293” shows that 29.3% vari

explained by a given change in Inflation Rate.



BSE Sensex








BSE Sensex is dependent variable








is dependent variable


















































than 5% significance level and so we can say that the model is fit and also the R






and so we can say that the model is fit and also the R













28

BSE Sensex=4497+1255.448(Inflation Rate) where,



value of “0.293” shows that 29.3% variation in the value of BSE Sensex can be


28

where,



ation in the value of BSE Sensex can be


where,








































and so we can say that the model is fit and also the R2



29

Relation between Inflation and CNX Nifty

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 CNX Nifty




Test of Regression of Inflation on CNX Nifty

The purpose of using regression is to analyze how much “change in CNX Nifty” is



is Inflation and unknown variable is CNX Nifty.

30

Correlation between inflation and CNX Nifty




CNX_Nifty 3981.9133 2290.34539 15

Correlations

Inflation_Rate CNX_Nifty

Inflation_Rate

Pearson Correlation 1 .536*


N 15 15

CNX_Nifty

Pearson Correlation .536* 1


N 15 15

*. Correlation is significant at the 0.05 level (2-tailed).

Observations

The level of significance is 0.039 which is less than 5% and so we can say that the

level of correlation between inflation and CNX Nifty is significant and also the


correlation between Inflation and CNX Nifty.


always give positive impact on CNX Nifty.

31

Regression between Inflation and CNX Nifty


Model Variables

Entered

Variables

Removed

Method


a. Dependent Variable: CNX_Nifty


Model Summary


Square

Std. Error of the

Estimate

1 .536a .287 .232 2006.73572


ANOVAa


1

Regression 21088700.571 1 21088700.571 5.237 .039b

Residual 52350847.271 13 4026988.252

Total 73439547.842 14



Coefficientsa


Coefficients

t Sig.

B Std. Error Beta

1 (Constant) 1440.061 1225.654 1.175 .261

Inflation_Rate 367.532 160.606 .536 2.288 .039


Observation


CNX Nifty=1440.061+367.532(Inflation Rate) where,


CNX Nifty

And


CNX Nifty

And 1440.061


CNX Nifty

1440.061

And now coming to the analysis part,


value of “



CNX Nifty

1440.061



value of “




1440.061



value of “




is the intercept



value of “0.287




is the intercept



0.287




is the intercept



0.287”




is the intercept



” shows that 28.7




is the intercept



shows that 28.7




is the intercept



shows that 28.7






shows that 28.7





shows that 28.7




shows that 28.7% vari




% vari


32

And now coming to the analysis part, the level of significance 0.039


% variation in the value of CNX Nifty


32

the level of significance 0.039


ation in the value of CNX Nifty




























the level of significance 0.039 which is less



which is less


ation in the value of CNX Nifty can be

which is less


can be

which is less


can be

which is less

than 5% significance level and so we can say that the model is fit and also the R2

can be

which is less

33

Relation between Inflation and BSE Bankex

So, In-order to find the relationship between Inflation and BSE Bankex 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 BSE Bankex




Test of Regression of Inflation on BSE Bankex

The purpose of using regression is to analyze how much “change in BSE Bankex” is



is Inflation and unknown variable is BSE Bankex.

34

Correlation between inflation and BSE Bankex




BSE_Bankex 9744.1625 5369.57479 12

Correlations

Inflation_Rate BSE_Bankex

Inflation_Rate

Pearson Correlation 1 .308


N 12 12

BSE_Bankex

Pearson Correlation .308 1


N 12 12

Observations

The level of significance is 0.330 which is more than 5% and so we can say that the

level of correlation between inflation and BSE Bankex is not significant and also the


correlation between Inflation and BSE Bankex.


always give positive impact on BSE Bankex.

35

Regression between Inflation And BSE Bankex


Model Variables

Entered

Variables

Removed

Method


a. Dependent Variable: BSE_Bankex


Model Summary


Square

Std. Error of the

Estimate

1 .308a .095 .005 5357.32616


ANOVAa

Model Sum of Squares Df Mean Square F Sig.

1

Regression 30146230.922 1 30146230.922 1.050 .330b

Residual 287009436.173 10 28700943.617

Total 317155667.095 11



Coefficientsa


Coefficients

T Sig.

B Std. Error Beta

1 (Constant) 5918.551 4040.469 1.465 .174

Inflation_Rate 499.536 487.414 .308 1.025 .330


Observation


BSE Bankex =5918.551+499.536(Inflation Rate) where,


BSE Bankex

And 5918.551


BSE Bankex

And 5918.551


BSE Bankex

And 5918.551

And now coming to

than 5% significance level and so we can say that the model

value of “0.095” shows that 9.5

explained by a given change


BSE Bankex

And 5918.551

And now coming to





BSE Bankex is dependent variable

And 5918.551

And now coming to






is the intercept

And now coming to






is the intercept

And now coming to






is the intercept

And now coming to






is the intercept

And now coming to






is the intercept







is the intercept

the analysis part,






the analysis part,





the analysis part,




the analysis part,



in Inflation Rate.

the analysis part,


% vari

in Inflation Rate.

36

the analysis part, the level of significance 0.330 which is more


% variation in the value of BSE Bankex

in Inflation Rate.

36

the level of significance 0.330 which is more


ation in the value of BSE Bankex

in Inflation Rate.




in Inflation Rate.




in Inflation Rate.











than 5% significance level and so we can say that the model is not



is not



is not



fit and also the R



fit and also the R

ation in the value of BSE Bankex can be


fit and also the R

can be


fit and also the R

can be


fit and also the R

can be


fit and also the R22

37

Relation between Inflation and Bank Nifty

So, In-order to find the relationship between Inflation and Bank 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 Bank Nifty




Test of Regression of Inflation on Bank Nifty

The purpose of using regression is to analyze how much “change in Bank Nifty” is



is Inflation and unknown variable is Bank Nifty.

38

Correlation between Inflation and Bank Nifty




Bank_Nifty 9679.3700 4248.23609 10

Correlations

Inflation_Rate Bank_Nifty

Inflation_Rate



N 10 10

Bank_Nifty



N 10 10

Observations


level of correlation between inflation and Bank Nifty is not significant and also the

Pearson Correlation value of “0.018” shows that there is a very weak positive or no

correlation between Inflation and Bank Nifty.

There is a very weak positive correlation between inflation rate and Bank Nifty.

39

Regression of Inflation and Bank Nifty


Model Variables

Entered

Variables

Removed

Method


a. Dependent Variable: Bank_Nifty


Model Summary


Square

Std. Error of the

Estimate

1 .018a .000 -.125 4505.24129


ANOVAa

Model Sum of Squares Df Mean Square F Sig.

1

Regression 49996.196 1 49996.196 .002 .962b

Residual 162377592.365 8 20297199.046

Total 162427588.561 9



Coefficientsa


Coefficients

T Sig.

B Std. Error Beta

1 (Constant) 9473.643 4383.152 2.161 .063

Inflation_Rate 24.375 491.132 .018 .050 .962


Observation


Bank Nifty=9473.643+24.375(Inflation Rate) where,


Bank Nifty

And 9473.643


Bank Nifty

And 9473.643


Bank Nifty

And 9473.643

And now coming to the analysis par

than 5% significance level and so we can say that the model is

value of “0.00

by a given change in Inflation Rate.


Bank Nifty

And 9473.643



value of “0.00




And 9473.643



value of “0.00




is the intercept



value of “0.00




is the intercept



value of “0.00




is the intercept



value of “0.00” sh




is the intercept



” shows that 0




is the intercept



ows that 0




is the intercept



ows that 0






ows that 0





ows that 0% var




% var


And now coming to the analysis part, the level of significance 0.


% variation in the value of Bank Nifty


40

t, the level of significance 0.


ation in the value of Bank Nifty

40

























t, the level of significance 0.962 which is more

not


62 which is more

fit and also the R

ation in the value of Bank Nifty can be explained

62 which is more

fit and also the R

can be explained

62 which is more

fit and also the R

can be explained

62 which is more

fit and also the R

can be explained

62 which is more

fit and also the R

can be explained

62 which is more

fit and also the R2

can be explained

2

can be explained

41

Relation between Inflation and BSE FMCG

So, In-order to find the relationship between Inflation and BSE FMCG 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 BSE FMCG




Test of Regression of Inflation on BSE FMCG

The purpose of using regression is to analyze how much “change in BSE FMCG” is



is Inflation and unknown variable is BSE FMCG.

42

Correlation of Inflation and BSE FMCG



BSE_FMCG 2906.8767 2237.59334 15


Correlations

BSE_FMCG Inflation_Rate

BSE_FMCG



N 15 15

Inflation_Rate



N 15 15

Observations

The level of significance is 0.102 which is more than 5% and near to 10% so we can

say that the level of correlation between inflation and BSE FMCG is moderately

significant and also the Pearson Correlation value of “0.439” shows that there is a

strong degree of positive correlation between Inflation and BSE FMCG.


always give positive impact on BSE FMCG.

43

Regression between inflation and BSE FMCG


Model Variables

Entered

Variables

Removed

Method


a. Dependent Variable: BSE_FMCG


Model Summary


Square

Std. Error of the

Estimate

1 .439a .192 .130 2086.82921


ANOVAa


1

Regression 13482405.184 1 13482405.184 3.096 .102b

Residual 56613129.937 13 4354856.149

Total 70095535.121 14



Coefficientsa


Coefficients

T Sig.

B Std. Error Beta

1 (Constant) 874.477 1274.573 .686 .505

Inflation_Rate 293.869 167.016 .439 1.760 .102


Observation


BSE FMCG=874.477+293.869(Inflation Rate) where,


BSE FMCG is dependent variable

And 874.477

And 874.477

And 874.477


than 5%

moderately

value of BSE FMCG

And 874.477


than 5%

moderately

value of BSE FMCG



than 5%

moderately

value of BSE FMCG

is the intercept


than 5% but near to 10%

moderately

value of BSE FMCG

is the intercept


but near to 10%

moderately fi

value of BSE FMCG

is the intercept


but near to 10%

fit and also the R

value of BSE FMCG

is the intercept


but near to 10%

t and also the R

value of BSE FMCG

is the intercept


but near to 10%

t and also the R

value of BSE FMCG can be explained by a given change in Inflation Rate.


but near to 10%

t and also the R

can be explained by a given change in Inflation Rate.


but near to 10% significance level and so we can say that the model is

t and also the R



significance level and so we can say that the model is

t and also the R2 value of “0.192




value of “0.192




value of “0.192


44



value of “0.192


44



value of “0.192




value of “0.192” shows that




” shows that




” shows that




” shows that




” shows that




” shows that 19.2




19.2% vari




% vari


102 which is


% vari


which is


% variation in the


which is


ation in the


which is more


ation in the

more


ation in the

more

ation in the

45

Relation between Inflation and BSE Consumer Durables

So, In-order to find the relationship between Inflation and BSE Consumer Durables 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 BSE Consumer Durables




Test of Regression of Inflation on BSE Consumer Durables

The purpose of using regression is to analyze how much “change in BSE Consumer

Durables” is responsible for a given change in Inflation. The purpose of regression is to

estimate the value of unknown variable from the known value of other variable. In our case

the known variable is Inflation and unknown variable is BSE Consumer Durables.

46

Correlation between Inflation and BSE Consumer Durables




BSE_Consumer_Durables 3968.6273 2866.36055 15

Correlations

Inflation_Rate BSE_Consumer

_Durables

Inflation_Rate



N 15 15

BSE_Consumer_Durables



N 15 15

Observations


level of correlation between inflation and BSE Consumer Durables is not significant

and also the Pearson Correlation value of “0.400” shows that there is a moderate

degree of positive correlation between Inflation and BSE Consumer Durables.


always give positive impact on BSE Consumer Durables.

47

Regression between Inflation and BSE Consumer Durables


Model Variables

Entered

Variables

Removed

Method


a. Dependent Variable: BSE_Consumer_Durables


Model Summary


Square

Std. Error of the

Estimate

1 .400a .160 .095 2726.26034


ANOVAa


1

Regression 18401878.581 1 18401878.581 2.476 .140b

Residual 96622440.766 13 7432495.444

Total 115024319.347 14



Coefficientsa


Coefficients

T Sig.

B Std. Error Beta

1 (Constant) 1594.213 1665.118 .957 .356

Inflation_Rate 343.322 218.192 .400 1.573 .140


Observation


BSE Consumer Durables= 1594.213+343.322(Inflation Rate) where,


BSE Consumer Durables is dependent variable

And 1594.213

And 1594.213

And 1594.213



value of “0.160” shows that 16


And 1594.213





And 1594.213





is the intercept





is the intercept





is the intercept





is the intercept





is the intercept





is the intercept











value of “0.160” shows that 16% vari




% vari




% vari


48



% variation in the value of BSE Consumer Durables


48



ation in the value of BSE Consumer Durables




























not


the level of significance 0.140 which is

fit and also the R


which is

fit and also the R


which is

fit and also the R


which is more

fit and also the R


more

fit and also the R


more

fit and also the R2


2

49

FINAL OBSERVATION AND CONCLUSION

So, on the basis of the result of both the test i.e. Test of Correlation and Test of Regression

conducted above, we could make out that-

The correlation coefficient of Inflation with major stock indices is sometimes highly

positively or sometimes very low positive. 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. So, by using above statements we can safely conclude that

stock market prices follow a random walk such that outperforming the stock market is not

possible

The regression coefficient of Inflation with major stock market indices is always positive.

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.

So, in the light of the all observation in all the above cases the results are:

1) In HYPTHESIS 1 Null hypothesis is rejected and Alternate hypothesis is accepted.

So, it signifies that there is significant relationship between inflation and BSE Sensex,

which means that increase or decrease in inflation will increase or decrease the

Sensex.

2) In HYPOTHESIS 2 Null hypothesis is rejected and Alternate hypothesis is accepted

So, it signifies that there is significant relationship between Inflation and CNX Nifty,

which means that increase or decrease in Inflation Rate will increase or decrease Nifty

BSE Sensex and CNX Nifty are the two major indices of Indian Stock Market which

represent the behavior of overall Stock market in India. Inflation affect these two

stock indices which means that inflation affect Indian Stock Market. So objective of

this study has been satisfied by these results.

But to get on concrete result we check 4 more indices BSE Bankex, Bank Nifty, BSE

Consumer Durables and BSE FMCG

3) In HYPOTHESIS 3 Null hypothesis is accepted and Alternate hypothesis is rejected.

So It signifies that there is no signification relationship between Inflation and BSE

Bankex

50

4) In HYPOTHESIS 4 Null hypothesis is accepted and Alternate hypothesis is rejected.

So, it signifies that there is no significant relationship between Inflation and Bank

Nifty.

5) In HYPOTHESIS 5 Null Hypothesis is accepted and alternate hypothesis is rejected

which means that there is no significant relationship between Inflation and BSE

FMCG.

6) In HYPOTHESIS 6 Null hypothesis is rejected and Alternate hypothesis is accepted.

So it signifies that there is significant relationship but moderately significant

relationship between Inflation and BSE Consumer Durables.

The purpose 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.

The final result goes in favor of the study that Inflation has relationship with Indian Stock

Market because Inflation shows a positive effect on most of the indices. So, the end result is

that Inflation always leave positive impact on Indian Stock Market

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Limitation of Study

Numerous studies have looked at the impact of inflation on stock returns. Unfortunately,

these studies have produced conflicting results when several factors are taken into account -

namely geography and time period.

Most studies conclude that expected inflation can either positively or negatively impact

stocks, depending on the ability to hedge and the government’s monetary policy.

But unexpected inflation did show more conclusive findings, most notably being a strong

positive correlation to stock returns during economic contractions, demonstrating that the

timing of the economic cycle is particularly important for investors to gauge the impact on

stock returns.

This correlation is also thought to stem from the fact that unexpected inflation contains new

information about future prices. Similarly, greater volatility of stock movements was

correlated with higher inflation rates.

The data of inflation is not all correct because government always change the base year of

inflation of time to time. The current base year of CPI is 2010 before that the base year was

1982. Change in the base year will also change the inflation rate.

The project is limited to “Relationship of Inflation with Indian Stock Market” because there

are various other macroeconomics factor that affect Indian Stock Market.

The data regarding Stock Market and Inflation is taken for the last 7-14 years only for the

study.

Time Perspective to conduct the study is yet another constraint.

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BIBLIOGRAPHY

www.wikipedia.com

www.investopedia.com

www.bseindia.com

www.moneycontrol.com

www.economictimes.indiatimes.com

www.nseindia.com

www.inflation.eu

Project report on Relationship Of Inflation with Indian Stock Market

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Transcript of Project report on Relationship Of Inflation with Indian Stock Market