Impact of Inflation On Stock Market Returns : Empirical Study

Abstract

This study examines the empirical relationship between inflation and stock market returns, with a focus on the Indian financial market. Inflation, a key macroeconomic indicator, significantly affects investor sentiment, purchasing power, and corporate profitability—all of which have a bearing on equity markets. The purpose of this research is to analyze whether inflation exerts a positive, negative, or neutral impact on stock market performance, both in the short and long term.

The study uses secondary data from sources such as the Reserve Bank of India (RBI), National Stock Exchange (NSE), and other financial databases. Statistical techniques including correlation analysis, regression analysis, and time-series models have been employed to determine the strength and direction of the relationship between the Consumer Price Index (CPI) and stock market returns (Nifty 50 index).

Preliminary findings indicate a moderate negative relationship between inflation and stock returns in the short term, suggesting that rising inflation may erode real returns and investor confidence. However, the long-term impact appears less significant, possibly due to market adjustments and inflation-hedging behaviors by investors.

This research contributes to a better understanding of inflation’s role in investment decisions and can guide policymakers, investors, and financial analysts in strategy formulation during inflationary periods.

This thesis explores how behavioral finance principles influence individual investment decisions, challenging the traditional notion that investors are fully rational. It highlights the impact of psychological biases such as loss aversion, overconfidence, mental accounting, and herd behavior on consumer preferences for products like mutual funds, SIPs, insurance, and stocks.

The study is based on primary data collected from 50 digitally active young Indian investors (mainly aged 18–35), who are increasingly turning to digital media and social networks for investment advice. Results show that emotional and social triggers, rather than purely logical analysis, often guide investment behavior.