How is Global Inflation affecting the Indian Stock Market?

Updated: Apr 8




We all are aware of the Global Inflation crises happening around the world. And Since India is a part of this family, with the rise in global prices, India might import more inflation to its domestic borders since the cost of raw materials and other imported goods will become higher. By the end of last year, US inflation broke a four-decade trend and soared to a record-breaking high of 7% year-on-year. As a result of the interruptions, input costs increased, leading to increased consumer prices over time. After new statistics showed inflation in the United States, Indian stock indexes and other global markets retreated. The invasion of Ukraine by Russia has simply fueled the inflation fire.


For a simple explanation about inflation, when inflation rises, the current worth of the money you will acquire in the future decreases. This is referred to as the current value of money. If inflation is 10%, your Rs.1000 receivable one year later will be worth Rs.900 today. In the Indian context, higher inflation diminishes the buying power of each unit of money or rupee.


In this scenario when inflation in rises and interest rates rise, the cost of capital rises as well. The cost of capital is the sum of the cost of debt and the cost of equity. When bond rates rise, the cost of capital rises as well, lowering the value of the company's future cash flows.

The present level of consumer price index (CPI) inflation is far greater than what was predicted a year ago. Because of the tight labor market and companies' attempts to recuperate lost revenues, service inflation has increased.


Oil prices are still a key concern. As oil prices approach US$130 per barrel, we should expect higher bond rates and a weaker Indian rupee in the short term, but an increase in oil company stock prices in the long run. Although the Russian discount on Russian oil may bring some relief in terms of oil prices.


Further, High or growing inflation indicates higher input costs for businesses. Individuals will be able to acquire fewer items, resulting in lower consumer expenditure. Bank regulators tend to hike interest rates when inflation is strong. Inflationary pressures raise interest rates. This raises the cost of capital for businesses. Both debt and equity are affected by inflation. Bond yields, or the rate of interest on bonds, climb when inflation rises. Along with an aggregate slowdown in economic growth, it will also have a negative impact on the company's income and earnings. These factors will almost certainly have a negative influence on mood, which will be represented in stock markets.


Many corporations' operating margins are expected to decline in the next quarters, according to brokerage firms. The cost of commodities is increasing. Foreign portfolio investors (FPIs) residing in the United States typically borrow in a low-interest-rate nation and invest in a high-interest-rate country (such as India). Their profit margin is also affected by variations in the dollar-rupee exchange rate. Although the World is more bullish about India than the rest of the globe.


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