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that if any part of the report is found to be plagiarized, I shall take full responsibility for it.
Signature Name and signature of student

Place
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Table of Contents

 Introduction…………………………………………….………...1
i. Inflation…………………………………………………………..1
ii. Types of inflation………………………………………………...1
iii. Causes of inflation…………………………….………………….1-3
iv. How inflation is measured……………………..............................3-4
 Literature Review……………………………………………...5
 Research Methodology……………………………………………6
 Objectives…………………………………………………………7
 Inflation in India…………………………………………………...8
 Issues………………………………………………………………8
 Optimal Inflation Rate……………………………………………..9
 Money Supply and Inflation……………………………………….9
 Global trade………………………………………………….........10
 Factors…………………………………………………………….10
 Demand factors…………………………………………………....10
 Supply factors……………………………………………………..11
 Domestic factors…………………………………………………..11
 External factors…………………………………………………....11
 Value……………………………………………………………....11-12
 What is Stock Market……………………………………………...13
 Types of Stock Market in India……………………………………13-14
 BSE: Bombay Stock Exchange…………………………………….14
 NSE: National Stock Exchange…………………………………....15
 What are the effect of inflation on an economy…………………....15
 How does rising Inflation affect Stock Market …………………………..16
 How are companies affected by inflation and how does investor view the
impact………………………………………………………………16

 Final Observation and Conclusion…………………………………17

 Bibliography………………………………………………………..18
IMPACT OF STOCK MARKETS

INTRODUCTION:
Stock markets are today regarded as a very important part of the
overall financial system as they boost growth of all sectors of
the economy by channelizing savings from funds-surplus units
of the society to funds deficit units and enables optimum
allocation and utilization of scarce capital resources thus
providing the base for long term sustainable economic growth.
As sound and efficient stock market is now considered crucial
for economic progress, focus has therefore shifted to establish
factors which determine stock returns. While financial theory
provides for company and industry specific factors, there is a
growing conviction among financial researchers that
macroeconomic variables do play a crucial role in determining
stock market performance. Among the macroeconomic
variables, inflation is considered to be one of the most crucial
factors impacting stock returns. Inflation is an increase in
general level of price of goods and services in an economy
resulting in a fall in purchasing power or value of money.

What is Inflation ?
Inflation is a situation of consistently rising prices in the
economy. A growing economy like India is likely to have a
certain level of inflation, but when the price rise is more than
expected, it becomes a concern. RBI increases interest rates to
stem higher-than-expected inflation or rise in prices of goods
and services. Higher rates increase the costs in the economy and
reduce overall spending, bringing down demand and, hence,
slowing price rise.
Other than its influence on interest rate policy, which can impact
stock prices, inflationary prices also affect corporate revenues
and profit. However, the precise impact on revenues is hard to
ascertain given other factors like volume and impact of inflation
on raw material prices.
Also, inflation takes away from your annual purchasing power.
If the inflation is 5%, then your ₹ 100 at the end of the year will
be worth ₹ 95. Hence, when calculating your real return from
investments, always consider the impact of inflation. Say, you
expected a 12% annual return from equity and the inflation is
5%, then your real return is 7%. Similarly, if your fixed deposit
gives 8% per annum, the real return net of inflation will be 3%.
 Impact of Inflation on Stock market
In India.

Stock traders, offen talk about rising inflation, which is eating

there profits and causing the market to perform badly. Every one
in India face the inflation issue We have tried to explain the
traders so that they understand what is inflation and also how
inflation affects the stock market. A smart trader understands the
market as well as the causes that affect the market. If as a
intraday trader if you wish to improve your success rate as a
stock market trader, you need to understand the relationship
between inflation and stock prices of shares.
Impact on Sensex, Nifty

Any unexpected rise in the inflation, CPI in India, is considered

worrisome for the corporates as it takes several months for them to
pass on higher input costs to consumers. Even the customers feel
pinch when goods and services become pricier. They also tend to
hold less cash in such a scenario, as inflation eats away their
savings. The investors with less cash holding tend to invest less in
the stock markets during such period. They also get confused since
impact is likely to impact the economy and stock prices, however
not at a same rate.
At times any rise in inflation is also considered good as it can help
in stimulating growth as seen in developed countries like the US.
But it can also impact corporate profits through higher input costs
as firms stop hiring. It’s therefore much required of an investor to
take wise decisions during periods of high inflation. Different
groups of stocks seem to perform better during periods of surging
inflation.

Effect on bonds
As inflation rises, investor interest dips in bonds and so does the
demand. So, the bond prices drop and yields rise as both are
inversely proportional to each other. Mostly, the central banks the
world over hike interest rates to counter the effect of surging
inflation.

Earliest inferences on relation between inflation and stock

returns were based on hypothesis presented by Irving Fisher in
1930. From Fisher’s hypothesis, it can be inferred that real
assets returns should move positively with expected inflation
rates. Thus, there should be a positive relationship between
Inflation and stock returns whereby nominal stock returns
should rise along with inflation providing investors a hedge
against inflation. On the other hand, a contrarian view of a
negative relation between inflation and stock returns is also very
much prevalent. Fama (1981) explained that negative stock
returns-inflation relations are induced by the positive correlation
between stock returns and real activity and the negative
correlation between inflation and real activity – the Proxy
Hypothesis. This is based on the following reasons:
 Increase in inflation increases the consumption expenditure
(as more money is required to buy same quantity of goods and
services), resulting in fall in savings and investment by
channelizing scarce resources meant for investment to
consumption. This decreases the demand for stocks and other
financial assets causing a fall in share prices.

Also, an increase in inflation adversely affects corporate

profits through increased input costs, increased interest pay-outs
and demand pressures. This again causes a fall in stock prices
due to adverse corporate performance.

From another perspective, a rise in inflation rate increases the

discount rate in the stock valuation model, leading to lower
share prices.

Increase in inflation would also attract monetary and fiscal

policies which would reduce money supply, increase interest
rates and curb aggregate demand. This would again adversely
affect growth rate, corporate performance and stock returns.
FINAL OBSERVATION AND CONCLUSION

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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BIBLIOGRAPHY

www.wikipedia.com
www.investopedia.com
www.bseindia.com
www.moneycontrol.com
www.economictimes.indiatimes.com
www.nseindia.com
www.inflation.eu
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