IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

CHAPTER 1 INTRODUCTION:
The India economy, the third largest economy in the world in terms of purchasing power, is going to touch new heights in coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy of the world just after US and China. It will grow to 60% of size of the US economy. This booming economy of today has to pass through many phases before it can achieve the current milestone of 9% GDP. The history of Indian economy can be broadly divided into three phases: Pre- Colonial, Colonial and Post Colonial. Pre Colonial: The economic history of India since Indus Valley Civilization to 1700 AD can be categorized under this phase. During Indus Valley Civilization Indian economy was very well developed. It had very good trade relations with other parts of world, which is evident from the coins of various civilizations found at the site of Indus valley. Before the advent of the East India Company, each village in India was a self sufficient entity and was economically independent as all the economic needs were fulfilled within the village Colonial Indian Economy: The arrival of the East India Company in India caused a huge strain to the Indian economy and there was a two-way depletion of resources. The British would buy raw materials from India at cheaper rates and the finished goods were sold at higher than normal price in Indian markets. During this phase India's share of world income declined from 22.3% in 1700 AD to 3.8% in 1952. Post Colonial Indian Economy: After India got independence from colonial rule in 1947, the process of rebuilding the economy started. For this various policies and schemes were formulated. First five year plan for the development of Indian economy came into implementation in 1952. These Five Year Plans, started by Indian government, focused on the needs of the Indian economy. If on one hand agriculture received the immediate attention on the other hand the industrial sector was developed at a fast pace to provide employment opportunities to the growing population and to keep pace with the developments in the world. Since then the Indian economy has come a long way. The Gross Domestic Product (GDP) at factor cost, which was 2.3 % in 1951-52 reached 6.5 in the financial year 2011-2012 Trade liberalization, financial liberalization, tax reforms and opening up to foreign investments were some of the important steps, which helped Indian economy to gain momentum. The Economic Liberalization introduced by Man Mohan Singh in 1991, then Finance Minister in the government of P V Narsimha Rao, proved to be the stepping-stone for Indian economic reform movements. To maintain its current status and to achieve the target GDP of 10% for financial year 200607, the Indian economy has to overcome many challenges.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

Challenges before Indian economy:

Population explosion:The rising population is eating into the success of India. According to 2011 census of India, the population of India has crossed one billion and isgrowing at a rate of 2.11% approx. Such a vast population puts lots of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population. Poverty:As per records of National Planning Commission, 36 crore people are living below the poverty line in India in 2012. Unemployment:The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean. Rural Urban Divide:It is said that India lies in villages, even today when there is lots of talk going about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in pace of rural and urban growth. Unless there isn't a balanced development Indian economy cannot grow.

These challenges can be overcome by the sustained and planned economic reforms. These include:

Maintaining fiscal discipline Orientation of public expenditure towards sectors in which India is faring badly such as health and education. Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India. Reorganization of agricultural sector, introduction of new technology, reducing agriculture's dependence on monsoon by developing means of irrigation. Introduction of financial reforms including privatization of some public sector banks.

The Indian economy will grow by 6.9 percent in this financial year (2012-13) notwithstanding problems like policy uncertainties, fiscal deficit and inflation, the World Bank has projected, while cautioning that developing nations will have to face tougher times. "India will see growth (measured at factor cost) increasing to 6.9, 7.2 and 7.4 percent in fiscal years 2012-13, 2013-14 and 2014-15, respectively," the World Bank said in the report titled 'Global Economic Prospects' . Referring to developments in 2011, the multi-lateral lending agency said that growth in India was particularly weak due to monetary policy, stalled reforms and electricity shortages. These factors, along with fiscal and inflation concerns, cut into investment activity, it added. India's economic growth rate in 2011-12 slipped to a nine-year low of 6.5 percent. The economy had expanded by 8.4 percent in the preceding two years.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

For the current fiscal, the government has pegged growth at 7.6 percent. Considering global uncertainties and domestic woes, this growth rate could be tall order for the country.

ECONOMY The seventh largest and second most populous country in the world, India has long been considered a country of unrealized potential. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise. India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. These include a free and vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations. Today, India is one of the most exciting emerging markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition.

Indian economy is witnessing a downturn, experiencing a decline in the GDP growth rate, high inflation, deteriorated performance of Industrial production, devaluation of the Indian Rupee (INR) against the US Dollar (USD), several political scams, uncertainty of government decisions regarding the reforms because of coalition government, and uncertain behavior of stock market. Performance of the economy as a whole and the performance of the stock market are in fact expected to be closely inter-linked. Fundamental analysis proposes that knowledge of economic conditions and macroeconomic factors would enable investors to anticipate/predict stock market performance. This approach certainly supports the decision making of investors by identifying the business-specific and sector-specific challenges. So, along with the company news, industry news, and other technical analysis tools; it becomes important to study the macroeconomic factors that impact the stock market. In this context, the main purpose of the paper is to examine the impact of selected macroeconomic factors on the performance of stock market. The independent macroeconomic factors which have been taken for analysis are net FIIs, the inflation rate, Index of Industrial Production (IIP) Growth, Exchange Rate (USD\INR) and Mumbai Interbank Offer Rate (MIBOR). The dependent variables are Sensex and S&P CNX Nifty returns as representative of stock market performance

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

The market reacts differently to various factors ranging from economic political, and sociocultural. The stock prices of quoted companies are affected either positively or negatively by a number of factors occurring within or without the economic system. The stock market is a general term used to refer to an organized exchange where shares of stock are traded. The movement of stock market depends on the rational well as the irrational behavior of the investor. The returns in the stock market could because of the micro economic factors like profits, business growth (new orders), P/E, dividend announced and the like which are pertaining to a particular company. Macro economic factors like inflation, GDP would also affect the over-all returns in the stock market. Hence a study will be undertaken to observe the impact of inflation and GDP on stock market returns and unearth the nature and strength of relationship between variable under study .

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

CHAPTER 2 REVIEW OF LITERATURE AND RESEARCH DESIGN:

Introduction To the study: The stock market is a general term used to refer to an organized exchange where shares of stock are traded. The movement of stock market depends on the rational well as the irrational behaviour of the investor. The returns in the stock market could because of the micro economic factors like profits, business growth (new orders), P/E, dividend announced and the like which are pertaining to a particular company. Macro economic factors like inflation, GDP would also affect the overall returns in the stock market. Hence a study will be undertaken to observe the impact of inflation, and GDP on stock market returns and unearth the nature and strength of relationship between variable under study. Statement of the problem: The market reacts differently to various factors ranging from economic, political, sociocultural etc. The study titled Impact of inflation and GDP on stock market returns in India is undertaken with an intention to understand overall market movements with respect to macro variables such as inflation and GDP.

Scope of the study: The scope of the project is restricted to find nature and strength of relation between stock market returns with respect to inflation and GDP.

Objectives of the study: 1. To study the relationship between stock market returns with respect to inflation, AND GDP. 2. To find the strength of the relation between stock market returns with respect to inflation and GDP.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA 3. To find the level of significance between market return with GDP growth rate and inflation rate.

HYPOTHESIS: OPERATIONAL DEFINITIONS OF CONCEPT: Inflation: Inflation can mean either an increase in the money supply or an increase in price levels. Generally, when we hear about inflation, we are hearing about a rise in prices compared to some benchmark. If the money supply has been increased, this will usually manifest itself in higher price levels - it is simply a matter of time. For the sake of this discussion, we will consider inflation as measured by the core Consumer Price Index (CPI), which is the standard measurement of inflation used in the U.S. financial markets. Core CPI excludes food and energy from its formulas because these goods show more price volatility than the remainder of the CPI. GDP: The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession or not.

Risk: The quantifiable likelihood of loss or less-than-expected returns. Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk. Stock market: A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. Money supply: The entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country's government or central bank. Public and private sector analysis is performed because of the money supply's possible impacts on price level, inflation and the business cycle. In the United States, the Federal Reserve policy is the most important deciding factor in the money supply.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

METHODOLOGY: 1. The research carried out will be descriptive in nature for the better understanding of the undertaken research analysis. 2. The research will also use regression, correlation to find out the nature and strength of the relationship between the variables under study. 3. The data regarding stock market returns, inflation, GDP will be taken for the last 10 to 15 years for the study. 4. Information regarding inflation, GDP, Stock market returns would be collected from the websites, websites of ministry of finance, BSE India. 5. Books will be referred to support the formation of certain conceptual definitions and depth knowledge of the subject. 6. Journals, Magazines and newspapers will be used to accumulate the latest information about the variable under study in the research.

TOOLS: Correlation: a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. regression: A statistical measure that attempts to determine the strength of the relationship between one dependent variable (usually denoted by Y) and a series of other changing variables (known as independent variables). The two basic types of regression are linear regression and multiple regression. Linear regression uses one independent variable to explain and/or predict the outcome of Y, while multiple regression uses two or more independent variables to predict the outcome. The general form of each type of regression is: Linear Regression: Y = a + bX + u Multiple Regression: Y = a + b1X1 + b2X2 + B3X3 + ... + BtXt + u Where: Y= the variable that we are trying to predict

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA X= the variable that we are using to predict Y a= the intercept b= the slope u= the regression residual. In multiple regression the separate variables are differentiated by using subscripted numbers. Regression takes a group of random variables, thought to be predicting Y, and tries to find a mathematical relationship between them. This relationship is typically in the form of a straight line (linear regression) that best approximates all the individual data points. Regression is often used to determine how much specific factors such as the price of a commodity, interest rates, particular industries or sectors influence the price movement of an asset.

Limitations of the study:

The project is limited to Impact of inflation and GDP on stock market returns in India The data regarding stock market returns, inflation and GDP will be taken for the last ** years only for the study. Time perspective to conduct the study is yet another constraint. The result may vary if weekly or monthly data is considered.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

CHAPTER 3: PROFILE OF THE INDUSTRY:

Stock market is considered as the barometer for the economic health of any country. The various phases of business and economic cycle are also reflected in the movement of stock market index. The epoch making changes in the stock market substantiates the relationship between the economic factors of a country and stock market movement. Thus the movement of macroeconomic factors plays an imperative role in influencing the movement of any stock market index. Among many macroeconomic factors, the movement of GDP plays a crucial role. The Gross Domestic Product reflects a consolidated report of the performance of the Indian economy. The ongoing changes in the Indian stock market and changes in the GDP in the last decade lead to many empirical studies. The market in which shares are issued and traded either through exchanges or over-thecounter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. stock market can be split into two main sections: the primary and secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. changes in stock market will affect GDP and vice versa. Government and policy makers should give importance to this bi-directional causal relationship while framing policies.

GDP: The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in recession or not.

GDP (Gross Domestic Product) is the sum total of value of all the goods and services produced in an economy during a given year. In short, it is the X-Ray report of how the economy is performing. GDP is the most crucial economic indicator which tells us about the health of our economy. It can help companies decide on what strategies they should adopt as also indicate to the policy makers, the effectiveness of the steps and decisions they have undertaken.

Usually in most countries GDP is computed via the expenditure method. The expenditure approach is based on the logic that all what is produced must be bought by somebody. In the expenditure method GDP is calculated as the sum total of private consumption (C), government expenditure (G), gross investment (I) made in the country, change in stocks and net exports i.e. total exports total imports of the country (X M) In equation form you can express it as GDP = C + G + I + (X M)

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

Another way of looking at GDP is by classifying it under sectoral contribution. Under this, the GDP is taken as the total value of goods produced by three major sectors: Agriculture and allied activities, Industry & Services. The service sector which includes sub segments like transport, insurance, finance, communication, construction etc. contributes a large share to the GDP in India. Similarly growth in Industry and its sub segments like manufacturing, mining, electricity etc are crucial for the growth of the GDP. These classifications can help to understand the changes in the components of GDP which can actually tell you where the economy is headed. This in turn can help you invest profitably in the markets. Real Gross Domestic Product (RGDP) and Stock Prices The measure of aggregate output in the national income accounts is Gross Domestic Product (GDP) according to Blanchard (1997). He stated that there are three ways of thinking about an economys GDP. These are that: GDP is the value of the final goods and services produced in the economy during a given period GDP is the sum of value added in the economy during a given period , GDP is the sum of incomes in the economy during a given period. Nominal GDP is simply the sum of the quantities of final goods produced times their current price. Economists use nominal for variables expressed in units of the currency of the relevant country. Nominal GDP increases over time for two reasons. The first is that the production of most goods increases over time. The second is that the price of most goods increases over time. In order to measure production and its change over time, the effect of increasing prices need to be eliminated. Hence, focus is on real GDP rather than nominal. Carstrom (2002) expressed that stock prices and future RGDP growth are related. He gave two prominent explanations for this; the first explanation was that changes in information about the future course of RGDP cause prices to change in the stock market today. He also said that changes in stock prices, no matter what the source is, will reduce firms asset positions and affect the cost of their borrowing. When it costs more for firms to borrow money, they borrow and invest less, RGDP growth slows. Changes in information about the future course of RGDP may cause prices to change in the stock market. This explanation suggests that while stock prices are used to predict future economic activity, the actual causality is from future GDP growth in current stock prices. GDP has a massive impact on almost all the economic factors in a country. Even a small change in GDP can have far reaching affects on the economy.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

India's GDP rate since 1951-51: Financial year 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 GDP of India at factor cost (in percent) 2.3 2.8 6.1 4.2 2.6 5.7 -1.2 7.6 2.2 7.1 3.1 2.1 5.1 7.6 -3.7 1 8.1 2.6 6.5 5 1 -0.3 4.6 1.2 9 1.2 7.5 5.5 -5.2 7.2 6 3.1 7.7 4.3 4.5 4.3 3.8 10.5 6.7 5.6 1.3 5.1 5.9 7.3 7.3

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2005-06 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 7.8 4.8 6.5 6.1 4.4 5.8 3.8 8.5 7.5 9 9.2 9.8 3.9 8.2 9.6 6.9

The Indian economy will grow by 6.9 percent in this financial year (2012-13) notwithstanding problems like policy uncertainties, fiscal deficit and inflation, the World Bank has projected, while cautioning that developing nations will have to face tougher times. "India will see growth (measured at factor cost) increasing to 6.9, 7.2 and 7.4 percent in fiscal years 2012-13, 2013-14 and 2014-15, respectively," the World Bank said in the report titled 'Global Economic Prospects' . Referring to developments in 2011, the multi-lateral lending agency said that growth in India was particularly weak due to monetary policy, stalled reforms and electricity shortages. These factors, along with fiscal and inflation concerns, cut into investment activity, it added. India's economic growth rate in 2011-12 slipped to a nine-year low of 6.5 percent. The economy had expanded by 8.4 percent in the preceding two years. For the current fiscal, the government has pegged growth at 7.6 percent. Considering global uncertainties and domestic woes, this growth rate could be tall order for the country.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA INFLATION: Inflation is a situation in the economy where, there is more money chasing less of goods and services. In other words, it means there is more supply/availability of money in the economy and there are less of goods and services to buy with that increased money. Thus goods and services commands a higher price than actual as more people are willing to pay a higher value to buy the same goods. In this inflationary situation, there is no real growth in the output of the economy per se. Its simply more money chasing few goods and services. For a brief moment let us suspend belief and imagine that all the money in the country is just Rs100. And all the goods produced in the country are just five apples. Naturally, each apple will fetch Rs20. Next year, the money doubles to Rs200 but the total goods produced are again five apples. Each apple will now fetch Rs40. That is what inflation is all about too much money chasing too few goods. Inflation is a hydra-headed monster, which has a desirable as well as an undesirable effect. The desirable part is that when prices are high, businessmen get more value for their goods, which entices them to produce more. The undesirable part is that when prices shoot up, people are forced to restrict their purchases, which can lead to recession. Rising oil prices have been one of the main causes of inflation though that is not all. A weak monsoon till recently brought about a shortage in food items and some commodities. There had also been a surge in foreign exchange inflows and to keep the price of the rupee stable, the RBI has been purchasing dollars and that means pumping in rupees into the system. To suck out the excess rupees from the system, the RBI follows a policy of sterile intervention which translates into the RBI issuing government securities. There is a limit to the quantum of government securities the RBI can issue and its stock of securities at the moment is insignificant. The RBI can tighten the monetary policy by raising interest rates, however, higher interest rates will hit the balance sheet of banks that have large interest rate exposures. Moreover, the RBI is also the banker to the government by virtue of which, it tends to keep the interest rate low so that the government's interest cost remains in control. Inflation is caused by a combination of four factors. 1. The supply of money goes up. 2. The supply of goods goes down. 3. Demand for money goes down. 4. Demand for goods goes up.

Types of InflationThere are four main types of inflation. The various types of inflation are briefed below. Wage Inflation: Wage inflation is also called as demand-pull or excess demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds the supply

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called as demand-pull inflation. This type of inflation affects the market economy adversely during the wartime. Cost-push Inflation: As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the unit costs of production and this would lead to rise in prices for the related end product. This type of inflation may or may not occur in conjunction with demand-pull inflation. Pricing Power Inflation: Pricing g power inflation is more often called as administered price inflation. This type of respective goods and services to increase their profit margins. A point noteworthy is pricing power inflation does not occur at the time of financial crisis and economic depression, or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of pricing their goods and services. Inflation occurs when the business houses and industries decide to increase the price of there. Sect oral Inflation: This is the fourth major type of inflation. The sectoral inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares would also go up. This would lead to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn. Other Types of Inflation Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget. For instance, Fiscal inflation originated in the US in 1960s at the time President Lydon Baines Johnson. America is also facing fiscal type of inflation under the president ship of George W. Bush due to excess spending in the defense sector. Hyper Inflation: Hyper inflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the complete breakdown of a country's monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rate touched approximately 322 percent per month with October being the month of highest inflation

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA