RBI (Reserve Bank of India) in its first monetary policy review of the FY19 came out with lower projections on inflation front. The central bank projected inflation for the current fiscal to be in the range of 4.7-5.1 percent on sharp moderation in food price rise and possibility of a normal monsoon. Although any upside or downside in the stock markets occurs due to a variety of factors, threat of inflation gets counted as one of the most blamed culprits. Inflation affects the Sensex and Nifty in a variety of ways.
What is inflation?
A hike in general price level of goods and services in an economy over a period of time is defined as inflation in economics.
Impact on Sensex, Nifty
Any unexpected rise in the inflation, CPI in India, is considered worrisome for the corporates as it takes several months for them to pass on higher input costs to consumers. Even the customers feel pinch when goods and services become pricier. They also tend to hold less cash in such a scenario, as inflation eats away their savings. The investors with less cash holding tend to invest less in the stock markets during such period. They also get confused since impact is likely to impact the economy and stock prices, however not at a same rate.
At times any rise in inflation is also considered good as it can help in stimulating growth as seen in developed countries like the US. But it can also impact corporate profits through higher input costs as firms stop hiring. It’s therefore much required of an investor to take wise decisions during periods of high inflation. Different groups of stocks seem to perform better during periods of surging inflation.
Effect on bonds
As inflation rises, investor interest dips in bonds and so does the demand. So, the bond prices drop and yields rise as both are inversely proportional to each other. Mostly, the central banks the world over hike interest rates to counter the effect of surging inflation.