Impact of Inflation In Economy and Capital Market

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Impact of Inflation In Economy and Capital Market

  1. 1. IMPACT OF INFLATION ON ECONOMY AND CAPITAL MARKET Pavan Kumar Vijay Managing Director
  2. 2. What is Inflation? “Inflation is nothing but the reduction in value of money”
  3. 3. Factors influencing inflation Food Prices Fuel Prices Commodities Fringe Services Growing income Levels Developed Lifestyle Government Policies
  4. 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. 5. Impact of Inflation Rate of Inflation Impact0-3% - Low Recession in Economy3-5% - Moderate Growth in EconomyAbove 5% - High Threat to Economy
  6. 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. 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. 8. Wage price Spiral Rising Higher Cost of Prices Living Increased Indexati demand of on of goods wages Higher wages
  9. 9. Interest rate and Inflation High Counter forces, Market favors borrowers; No impact poor returns on savingsInflation Best for Long Term Growth depositors Low High Interest Rate
  10. 10. Impact on Capital Market Inflation translates into higher costs and lower returns. Foreign investors get disenchanted. Discourages foreign Capital Volatility in Stock Market
  11. 11. Impact on Capital Market: Long-term Contracts Loss – term Contracts
  12. 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. 13. Impact on Companies CompaniesDiversion 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. 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 inWeakening of entire Repayment defaults inflation reduces economy on maturity resources to repay the debt
  15. 15. Inflation at the end High interest rates Sharp recession Highly volatile stock market Job losses
  16. 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.
  17. 17. Inflationary premise “Do not keep your money stagnant.”
  18. 18. Thank You …

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