Technical Leaders - Working with the Management Team
Impact of Inflation In Economy and Capital Market
1. IMPACT OF INFLATION ON ECONOMY AND
CAPITAL MARKET
Pavan Kumar Vijay
Managing Director
2. What is Inflation?
“Inflation is nothing but the reduction in value of money”
3. Factors influencing inflation
Food Prices
Fuel Prices
Commodities
Fringe Services
Growing income Levels
Developed Lifestyle
Government Policies
4. Measurement of Inflation
Wholesale Price Index
Consumer Price Index
WPI does not pick up the reduction is taxes that the states announce
because that’s something that happens in the retail and therefore does
not give the consumer the true picture about commodity prices .
Therefore, CPI is better than WPI for measurement of Inflation.
5. Impact of Inflation
Rate of Inflation Impact
0-3% - Low Recession in Economy
3-5% - Moderate Growth in Economy
Above 5% - High Threat to Economy
6. Impact of Inflation on Economy
Higher rate of interest charged by banks on borrowings.
Higher rate of interest demanded by depositors.
Early payment of borrowings.
Decrease in investment.
Uncompetitive Exports
Pressure on Balance of Payment
Depreciation of Currency
Loss of Credibility
7. Impact of Inflation on Economy
Reduction in Volume of Production
Bad quality of production
Effect on wages leads to wage price spiral
Disruptive Price System
Moral Effects
Political Instability
Unequal distribution of Wealth
“Rich become richer and Poor becomes poorer”
8. Wage price Spiral
Rising
Higher
Cost of
Prices
Living
Increased Indexati
demand of on of
goods wages
Higher
wages
9. Interest rate and Inflation
High
Counter forces,
Market favors borrowers;
No impact
poor returns on savings
Inflation
Best for
Long Term Growth
depositors
Low High
Interest Rate
10. Impact on Capital Market
Inflation translates into higher costs and lower returns.
Foreign investors get disenchanted.
Discourages foreign Capital
Volatility in Stock Market
12. Impact on investors
Investors
Loss in the value of interest on savings
Less keen to savings in future
Less investment
Real time loss to whole economy
13. Impact on Companies
Companies
Diversion of efforts from productive activities to
drawing strategies in coping with inflation.
Enormous involvement in inventory management
Reported profits are untrustworthy
Frequent adjustment in wages
Failure of budgets and long-term plans.
Loss of National Productivity
14. Capital Market scenario
Easy repayment of
Short-term loan tempt More debt
investments in borrowers to add magnifies risk to the
securities. debt to their investments
portfolio
Further increase in
Weakening of entire Repayment defaults inflation reduces
economy on maturity resources to repay
the debt
15. Inflation at the end
High interest rates
Sharp recession
Highly volatile stock market
Job losses
16. Anti – inflationary measures
Balanced mix of monetary and fiscal policies.
Monetary measures curb inflation in short term while fiscal
measures take care of inflation in long run.
RBI follows gradual tightening in its monetary policy through
periodic increases in the Repo rate as well as the CRR.