Inflation of Stock Market (Capital Market)

“Inflation is nothing but the reduction in value of money”

Factors influencing inflation -

  • Food prices
  • Fuel prices
  • Commodities
  • Fringe Services
  • Growing income level
  • Developed lifestyle
  • Govt. policies

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

  • Higher rate of interest charged by banks on borrowings
  • Higher rate of interest demanded by depositors
  • Early payment of borrowings
  • Decrease in investment
  • Depreciation of currency
  • Loss of credibility
  • Reduction in volume of production
  • Effect on wages leads to wage price spiral
  • Disruptive price system
  • Political Instability
  • Unequal distribution of wealth.

i.e. “rich become richer & poor becomes poorer”

Capital market scenario –

  • Short term investment in securities.
  • Easy repayment of loan tempt borrower to add details to their portfolio.
  • More debt magnifies risk to the investments.
  • Weakning of entire economy
  • Further increase in inflation reduces resources to repay the debt.
  • Repayments defaults on maturity
  • Weakening of entire economy.