You are on page 1of 48

GOOD

AFTERNOO
N FRIENDS
INFLATION
&
RISK
INFLATION
Inflation is too much money & deposit currency that
is too much currency in relation to the physical
volume of business being done.
-
Kemmerer

Inflation is simply a persistent & appreciable rise in


general price level.
-
Shapiro
TYPES

 Basis of the degree of government control


 Basis of political conditions
 Basis of rate of inflation
 Basis of scope
 According to process
BASIS OF THE DEGREE OF GOVERNMENT CONTROL

SUPPRESSED
OPEN INFLATION
INFLATION
OPEN INFLATION

It is a process in which prices are allowed to rise


without any attempt on the part of the
government control. Prices continue to rise
according to demand & supply conditions.
SUPPRESSED
INFLATION

It refers to a situation in which rising prices are


checked by administrative measures like
rationing, price control etc. by government.
BASIS OF POLITICAL CONDITIONS

WAR TIME POST WAR PEACE TIME


INFLATION INFLATION INFLATION
WAR TIME
INFLATION

In order to meet war expenses government


increases the supply of money. Large
proportion of production is bought by
government itself. Relatively small proportion
of production is available to the people. As
result prices begin to shoot up. Thus inflation
that takes place during the course of war is
called war time inflation.
POST WAR
INFLATION

Tendency of inflation persists even after the war


mainly due to 2 reasons. Firstly, government
has to spend large amounts on repair &
reconstruction of damaged property. secondly,
taxes levied during war are abolished & loans
taken from public are repaid.
PEACE TIME
INFLATION

Underdeveloped countries need large resources


for economic planning & development
programmes. In order to mobilize resources,
government has to resort to deficit financing.
It leads to rise in prices which is popularly
known as peace time inflation.
BASIS OF RATE OF INFLATION

HYPER
CREEPING WALKING RUNNING
INFLATION
INFLATION INFLATION INFLATION
CREEPING
INFLATION

It refers to that inflation wherein prices rise


very slowly. It is not only beneficial to
economy but is also considered essential.
Some economists are of the view that 3% rise
in prices can be called creeping inflation.
WALKING
INFLATION

When price rise becomes intense & quantum of


inflation gains momentum or when prices rise
between 30 & 40% is called walking inflation.
RUNNING/GALLOPIN
G
INFLATION
When there is rapid increase in prices in very
short period is called running inflation. In this
case, inflation rate is between 80 & 100% over
a decade. Such an inflation has an adverse
impact on middle or poor classes.
HYPER INFLATION

It refers to a situation when prices rise at an


unexpected rate. There is an escalation of
price rise. It is called Hydra-headed Monster
of inflation. It puts the entire economy out of
gear.
BASIS OF SCOPE

SECTORAL COMPREHENSIVE
INFLATION INFLATION
SECTORAL/SPORADI
C
INFLATION
When inflation affects only a particular part of
the country or covers only one or two goods
like pulses, petrol etc. it is called sporadic
inflation.
COMPREHENSIVE
INFLATION

When inflation is not confined to a given part of


the country or a few goods, but engulfs the
entire economy and all goods, then it is called
comprehensive inflation.
ACCORDING TO PROCESS

WAGE INDUCED PROFIT INDUCED DEFICIT INDUCED STAGFLATION


INFLATION INFLATION INFLATION
WAGE INDUCED
INFLATION

Powerful labour organizations have strong


bargaining power vis-à-vis employers. They
succeed in getting their wages increased. This
results in to higher cost of production &
increased prices. Such a rise in prices is called
wage induced inflation.
PROFIT INDUCED
INFLATION

In developed countries big companies while


fixing the price of their commodities add a
given percentage of profit to the costs. This
act is called mark-up. These companies keep
the mark-up quite high. Consequently
commodities prices rise very high & inflation
takes place. Such an inflation is called mark-
up or profit induced inflation.
DEFICIT INDUCED
INFLATION

Such an inflation is the outcome of deficit


financing by the government. It takes place
due to increase in money supply in the wake
of deficit financing, without any
corresponding increase in the supply of goods
& services.
STAGFLATION

It involves inflationary rise in prices & wages at


the same time that people are unable to find
jobs & firms are unable to find customers for
what their plants can produce.
THEORIES OF
INFLATION

 Demand pull inflation theory

 Cost pull inflation theory


CAUSES OF
INFLATION

Inflation is an outcome of an imbalance in


demand for & supply of goods. when demand
exceeds supply or cost rises then inflation
takes place. Thus causes of inflation have 2
sides:

1. Demand side
2. Supply side
CAUSES RELATED
TO DEMAND
 Increase in public expenditure
 Deficit financing
 Cheap monetary policy
 Increase in disposable income
 Black money
 Increase in investment
 Reduction in taxes
 Less public borrowing
 Increase in population
 Increase in exports
CAUSES RELATED
TO SUPPLY
 Less production
 Artificial scarcity
 Taxation policy of the government
 Shortage of food grains
 Industrial disputes
 Technical changes
 Lack of raw materials
 Natural calamities
 Productive set-up
 War
EFFECTS OF
INFLATION
 Effect on debtors & creditors
 Effect on investors
 Effect on fixed salaried class
 Effect on agriculturists
 Effect on savings
 Effect on balance of payments
 Effect on employment
 Effect on taxes
 Effect on public debts
RISK

THE MEANING OF RISK IS THE POSSIBILITY OF LOSS OR


INJURY. RISK OF HOLDING SECURITIES IS GENERALLY
ASSOCIATED WITH THE POSSIBILITIES THAT REALIZED THE
RETURNS WILL BE LESS THAN THE RETURNS THAT WERE
EXPECTED.

Risk = (Probability of risk occurring) X (Impact of risk


occurring)
RISK Vs
UNCERTAINITY
Uncertainty Risk

The lack of complete A state of uncertainty


where some of the
certainty, that is,
possibilities involved
the existence of a loss, catastrophe, or
more than one other undesirable
possibilities. outcomes.
TYPES OF RISK
RISK

SYSTEMATIC RISK UNSYSTEMATIC RISK

MARKET INTEREST INFLATIONARY


RISK RATE RISK
RISK
BUSINESS FINANCIAL
RISK RISK

INTERNAL EXTERNAL
BUSINESS BUSINESS
RISK RISK
SYSTEMATIC RISK
 The systematic risk affects the entire
market. It means the entire market moves in
the same direction either upward or
downward.

 The economic conditions, political situation


and the sociological changes affects the
security market.

 These are beyond the control of the


corporate and investor.

 Such as South East Asian Crisis has affected


the stock market world wide.
MARKET RISK

 Market risk is defined as the portion of total


variability of return caused by the alternating forces
of bull and bear markets.

 When the security index moves upward is known as


Bull market. Bear market is just opposite to bull
market.

 The forces affects the stock market are of two


types:

 Tangible: earthquake, war political uncertainty


 Intangible : market psychology
INTEREST RATE
RISK
 Interest rate risk is the variation in the single period rates
of return caused by the fluctuations in the market interest
rate.
 Interest rate is affects by the price of bonds, debentures
and stocks.
 This change occurs due to the change in the monetary
policy of the government. Such as change in the interest
rate of treasury bills and government bonds.
 If the stock market is weak than investor will shift to bond
market to get secure rate of return.
 Cost of borrowing is affected by the rate of return.
PURCHASING
POWER RISK

 Variation in the return caused by the loss of


purchasing power of the currency creates this
risk. Inflation is its cause.
 The inflation may be demand-pull or cost-push
inflation.

 Demand pull inflation – demand for goods


and services > the supply
 Cost push inflation – when the price of the
products rises because of the increase in the
cost of the raw material etc..
UNSYSTEMETIC
RISK

Unsystematic risk is unique and peculiar to a firm or


an industry. This risk stems from managerial
inefficiency, technological change, availability of
raw material and labour problem.

For example : Changes in the consumer preference


affects the consumer products like TV, washing
machine, refrigerators, etc. more than they affects
the iron and steel industry.
BUSINESS RISK

Business risk rises from the inability of a firm to


maintain its competitive edge and the growth or
stability of the earnings. Operating environment risks
reflected on the operating income and the earnings.

Types of business risk


 Internal risk

 External risk
INTERNAL RISK

Internal risk is associated with the


operational efficiency of the firm. The
efficiency reflected on the company’s
achievement of its pre-set goals and
the fulfillment of the promises to the
investors.

 Fluctuations in the sale


 Research and development
 Personnel management
 Fixed cost
 Single product
EXTERNAL RISK

External risk is the result of operating


conditions imposed on the firm by
circumstances beyond its control.

 Social and regulatory factors


 Political risk
 Business cycle

For example, the Indian sugar and fertilizer


industry depend much on external factors.
FINANCIAL RISK

 Financial risk in a company is associated with


the capital structure of the company. Capital
structure of the company consists of equity
funds and borrowed funds.

 The use of the debt with the owned funds will


increase the returns to the shareholders.

 Debt financing enables the firm to have funds


at a low cost.
EFFECTS OF RISK &
INFLATION IN
BANKING SECTOR
RISK & INFLATION
IN BANKING
SECTOR
Inflation might affect economic growth through the
banking sector is by reducing the overall amount of
credit that is available to businesses. Higher
inflation can decrease the real rate of return on
assets. Lower real rates of return discourage
saving but encourage borrowing. At this point, new
borrowers entering the market are likely to be of
lesser quality and are more likely to default on
their loans. Banks may react to the combined
effects of lower real returns on their loans and the
influx of riskier borrowers by rationing credit.
INFLATION ON
BANK LENDING

Several economists have found that countries


with high inflation rates have inefficiently
small banking sectors and equity markets.
This effect suggests that inflation reduces
bank lending to the private sector, which is
consistent with the view that a sufficiently
high rate of inflation induces banks to ration
credit.
Inflation on
Asset Returns and
Bank
Profitability
Inflation is negatively associated with real
money market rates, real treasury bill rates,
and real time-deposit rates, that is, as
inflation increases, the real rate of return on
these instruments falls. Inflation does appear
to have a negative impact on bank
profitability measures. The impact of inflation
on real rates is most evident at the extreme.
EFFECT OF RISK &
INFLATION ON
INVESTORS
Variation in return are caused by the loss of
purchasing power of currency. inflation risk is the
probable loss in the purchasing power of return to
be reduced. In demand pull inflation the demand of
goods & services are in excess of their supply.

In cost pull inflation price rises due to increase in


cost. The increase in the cost of raw material, labour
makes the cost of production high.

Both type of inflation reduce the purchasing power of


return got by the investor that create risk.
PROTECTION AGAINST
INFLATIONARY RISK

 The general opinion is that with fixed return


securities problem cannot solve.

 Another way to avoid the risk is to have investment


in short term securities & to avoid long term
investment.

 Investment diversification can also solve this


problem to certain extent.

 By purchasing different combination of financial


derivatives we can reduce the inflationary risk.
THANK
YOU