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

11. Impact on Capital Market:
Long-term Contracts Loss – term Contracts

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.

17. Inflationary premise
“Do not keep your money stagnant.”

18. Thank You …