TERM PAPER OF

QUANTITATIVE
TECHNIQUES II

TOPIC :IMPACT OF INFLATION ON THE

GROWTH OF THE ECONOMY

SUBMTTED TO:
SUBMITTED BY:
SATINDER KUMAR
VARUNKAKKAR
RR1813
B49
10810014
 INFLATION
Inflation is an on-going rise in prices, as measured by the change in price of a so called "basket
of goods". Generally inflation figures are given on a yearly basis.

CAUSES OF INFLATION

The basic causes of inflation were covered at AS level. This note considers the demand and
supply-side courses in more detail including the impact of changes in the exchange rate and the
prices of goods and services in the international economy.

Cost Push Inflation

Cost-push inflation occurs when businesses respond to rising production costs, by raising prices
in order to maintain their profit margins. There are many reasons why costs might rise:

Rising imported raw materials costs perhaps caused by inflation in countries that are heavily
dependent on exports of these commodities or alternatively by a fall in the value of the pound in
the foreign exchange markets which increases the UK price of imported inputs. A good example
of cost push inflation was the decision by British Gas and other energy suppliers to raise
substantially the prices for gas and electricity that it charges to domestic and industrial
consumers at various points during 2005 and 2006.

Rising labour costs - caused by wage increases which exceed any improvement in productivity.
This cause is important in those industries which are ‘labour-intensive’. Firms may decide not to
pass these higher costs onto their customers (they may be able to achieve some cost savings in
other areas of the business) but in the long run, wage inflation tends to move closely with price
inflation because there are limits to the extent to which any business can absorb higher wage
expenses.

Higher indirect taxes imposed by the government – for example a rise in the rate of excise
duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of
Value Added Tax or an extension to the range of products to which VAT is applied. These taxes
are levied on producers (suppliers) who, depending on the price elasticity of demand and supply
for their products, can opt to pass on the burden of the tax onto consumers. For example, if the
government was to choose to levy a new tax on aviation fuel, then this would contribute to a rise
in cost-push inflation.

Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve.
This is shown in the diagram below. Ceteris paribus, a fall in SRAS causes a contraction of real
national output together with a rise in the general level of prices.

The wage price spiral – “expectations-induced inflation”

Rising expectations of inflation can often be self-fulfilling. If people expect prices to continue
rising, they are unlikely to accept pay rises less than their expected inflation rate because they
want to protect the real purchasing power of their incomes. For example a booming economy
might see a rise in inflation from 3% to 5% due to an excess of AD. Workers will seek to
negotiate higher wages and there is then a danger that this will trigger a ‘wage-price spiral’ that
then requires the introduction of deflationary policies such as higher interest rates or an increase
in direct taxation.

Global Recession and Its Impact on the Asian

Economy
Black Thursday 1929
 Stock Market Crash
 Passive Federal Reserve System
 Ignorance of Keynesian Pump Priming
 Panic in the Banking Sector
 Unemployment Rate of 25%
 Complete Dominance of the US Economy in the World
 World Financial Market Illiquid

Black Monday 2008

 Real Estate Bubble
 Proactive Federal Reserve System
 US Government Pump Priming
  No Panic in the Banking Sector
 No Crash in the Stock Market
 Unemployment Rate Manageable
 Countervailing Power of Emerging Markets
 Liquidity of Sovereign Funds
 Massive intervention of European governments

Growth Rates of Major Economies

4.0
3.0
2.0
1.0
0.0 2008F

2009F
2003

2004

2005

2007
2002

2006

US Euro Area Japan

World Growth (GDP Growth Rates)
2001 2002 2003 2004 2005 2006 2007 2008F 2009F
US 0.8 1.6 2.5 3.6 2.9 2.8 2.0 1.6 0.1
Euro Area 1.9 0.9 0.8 2.1 1.6 2.8 2.6 1.3 0.2
Germany 1.2 … -0.2 1.2 0.8 3.0 2.5 1.8 0.2
France 1.9 1.0 1.1 2.5 1.9 2.2 2.2 0.8 0.2
Italy 1.8 0.5 … 1.5 0.6 1.8 1.5 -0.1 -0.2
Spain 3.6 2.7 3.1 3.3 3.6 3.9 3.7 1.4 -0.2
Netherlands 1.9 0.1 0.3 2.2 2.0 3.4 3.5 2.3 1.0
Japan 0.2 0.3 1.4 2.7 1.9 2.4 2.1 0.7 0.5
United Kingdom 2.5 2.1 2.8 2.8 2.1 2.8 3.0 1.0 -0.1
Canada 1.8 2.9 1.9 3.1 2.9 3.1 2.7 0.7 1.2
Australia 2.1 4.2 3.0 3.9 2.8 2.7 4.2 2.5 2.2

Global Growth Slowdown

Threats to World Growth
 High rates of inflation
 Financial meltdown in the U.S.
 Tight credit despite lower interest rate
 High albeit moderating food and fuel prices
 Slowdown in the EU and Japan
 The U.S. twin (fiscal and trade) deficits continue to cause concern
U.S. Economy:
Still no end to financial turmoil
 Huge losses in the financial sector
 Still uncertain results of U.S. government bailouts of failing banks
 Previously robust private consumption spending has been depressed by the slump in the
housing market
 Real GDP growth to fall from 2.0% in 2007 to 1.6% or lower in 2008

Japanese Economy

 Political instability caused by successive resignations of two Prime Ministers

 Despite a stronger than expected GDP outturn in the first quarter of 2008, Japan’s
economic outlook is weak for 2008 and 2009.
 The yen weakened against the U.S. dollar in June but may strengthen if U.S. economy
continues to be troubled by financial crisis.
 Consumer prices will rise in 2008
 Reserves may be used to help ailing banks in the Asian region ]

Asian Financial Crisis

GDP Growth Rates
Southeast Asia 1996 1997 1998 1999 2000 2001
Indonesia 7.8 4.7 -13.1 0.8 4.9 3.3
Malaysia 10.0 7.3 -7.4 6.1 8.3 0.4
1996 1997 1998 1999 2000 2001
Philippines 5.8 5.2 -0.6 3.4 4.4 3.2
East Asia
Singapore 7.7 8.5 -0.1 6.9 10.3 -2.0
China, People's Rep. of 9.6 8.8 7.8 7.1 8.0 7.3
Thailand 5.9 -1.4 -10.5 4.4 4.6 1.8
Hongin
Threats Kong, China
China 4.5 5.0 -5.3 3.0 10.5 0.1
Viet Nam 9.3 8.2 5.8 4.8 6.8 ...
Korea, Rep. of 6.7 5.0 -6.7 10.9 9.3 3.0
Taipei,China 6.1 6.7 4.6 5.4 5.9 -1.9
Others
 Threats in China

Threats in China
 Overheating economy: possible credit and stock market bubble

 Inflation rate reached 6.5% in October 2007, the highest monthly

inflation in 11 years

 Efforts to cool down economy may result in hard landing

 Underdeveloped banking sector

 Undervalued currency

 Uncontrolled local officials

 Shortage of local entrepreneurs and managers

 High rates of poverty

 Stricter regulations in IT

Domestic Markets
 Mid-Year Age Distribution Age
Population 2006 (as % of total population)
(in millions)
Dependency
0-14 15-60 60+ Ratio
Southeast Asia 566.3

Indonesia 222.1 28 64 8 56
Malaysia 26.6 32 61 7 64
Philippines 87.0 35 59 6 69
Singapore 4.5 19 68 13 47
Thailand 65.2 23 66 11 52
Vietnam 84.2 29 64 7 56

Consumer Trends in Asia

 Non-income consumption factors

 Expanding middle class

 Diversity of consumer tastes and lifestyles

 “Mallification” of Asian cities

 Demographic gift stage in South and Southeast Asia

 Rapid aging in Northeast Asia and Singapore

 Widespread use of English

 The telecom revolution

 Spread of university education

 INFLATION & ITS IMPACT ON
INDIAN STOCK MARKET
To find the effect of inflation on Indian stock market areserch has
been conducted the data is as follows

Objective
• Through this we would focus on the following area

• Find out the factor which impact the market most,

• To find whether they are short term or long term investor.

• To know the mindset of investors towards Indian banking

system.

• To analysis the impact of recession on Indian investor &

stock market.
Research Design
 Secondary Research

Collection of data from various websites to understand the

relationship between Sensex, US Dollar and FII’S.

 Primary Research:

 A Primary Research has been conducted.

 The questionnaire was prepared for the investors to

find out…

 Investor’s profile

 What impact the Indian stock market.

 Their view on Indian banks.

Their Positive-ness for Indian stock market.

Sampling Plan
 Elements:

 The target population of the study included the general

population above the age of 25 yrs

 Sampling design and sampling unit are as follows:

 Sampling frame- Urban class in the Delhi(NCR) region

 Sample size: 100

You hold the stocks for how much time period?

What significantly impact the Indian stock market?
To whom you blame for losses you have incurred?
Will you stay invested in the stock market?
Which one is your preferred stock in which do you want to
invest
Where do you see BSE sensex one year from now?
REVIEW OF LITREATURE
1)Global Economic Recession, Lay-offs and Its Impact on You -
Survival of the Fittest
HIMACHLI SANJEEV examined that Most of the countries all over the world are going
through this phase of economic recession. Many old and big companies have already been
brought down on their knees to bite the dust. Many companies as well as countries have become
bankrupt or are on the verge of it. Millions and millions of people have lost their jobs. Many
people have lost millions and billions of dollars. People in general are scared and fearsome. This
is not the first time that the global economy is going through recession and this is also not the
last time. There is a pattern involved in it. On an average it is happening after every 8-10 years.
This article is an attempt to highlight some of the issues involved and some of the possible
solutions.

http://ezinearticles.com/?Global-Economic-Recession,-Lay-offs-and-Its-Impact-on-You---
Survival-of-the-Fittest&id=1844225

2)Impact of recession in American economy on India

Pandit Shweta , Malik Tanveer examined that The fear of a recession looms over the United
States. And as the clich goes, whenever the US sneezes, the world catches a cold. This is evident
from the way the Indian markets crashed taking a cue from a probable recession in the US and a
global economic slowdown. It also tells that Weakening of the American economy is bad news,
not just for India, but for the rest of the world too.

http://www.fibre2fashion.com/industry-article/9/877/impact-of-recession-in-american-
economy-on-india1.asp

3)Global Economic Recession Hits Newport Beach

Real Estate
DSouza Sophie ,2009 examined that Real Estate Markets have suffered a lot due to ongoing
global economic crisis worldwide. Either it be in US, UK China or India real estate prices have
reached to theri minimum level in when compared to past three years records.
As far as US is concerned the real estate prices of all real estates have suffred a lot and New Port
beach Real Estate is no longer a exception to this. Once the Costliest Real Estates in US, now
Newport Beach Real Estate prices breaks the market records.

http://www.articlesbase.com/real-estate-articles/global-economic-recession-hits-newport-
beach-real-estate-1257535.html

4) Impact of global recession on India

Verma Sonia,2009 examined that America is the most effected country due to global recession,
which comes as a bad news for India. India have most outsourcing deals from the US. Even our
exports to US have increased over the years. Exports for January declined by 22 per cent. There
is a decline in the employment market due to the recession in the West. Some companies have
laid off their employees and there have been cut in promotions, compensation and perks of the
employees. Companies in the private sector and government sector are hesitant to take up new
projects. And they are working on existing projects only. IT industries, financial sectors, real
estate owners, car industry, investment banking and other industries as well are confronting
heavy loss due to the fall down of global economy. Federation of Indian chambers of Commerce
and Industry (FICCI) has faced with the global recession, inventories industries like garment,
gems, textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent

http://www.merinews.com/article/impact-of-global-recession-on-india/15709750.shtmlt.
5) Learning From The Causes of Economic Recession
Will be the Greatest Benefits of Economic Recession

Buchanan brad,2009 examined that an economic recession is ugly. Consumers lose their jobs,
lose their homes, file for bankruptcy and tighten spending. Businesses shed jobs, cut wages,
lay-off employees and collapse. Lending institutions have trouble collecting from debtors
and this dries up their liquid assets. Investors see drops in profits and nervously pull their
money out. As a result, our Gross Domestic Product declines and our nation as a whole
becomes poorer. Is there no end in sight for our current despair? Global economics experts
have a thing or two to say about the current crisis. The start of ending the recession is to stop
focusing on the causes of economic recession and look for the benefits of economic
recession.

http://www.articlesbase.com/psychology-articles/learning-from-the-causes-of-economic-
recession-will-be-the-greatest-benefits-of-economic-reces

6) Behind The Hitch: The Causes Of Economic

Recession
Kumar manoj,2010 examined that Economic recession lasts for eleven months and may reach
until two years. While a recession that is short lived is called economic correction. Meanwhile a
sustained recession turns into a depression. John Maynard Keynes states that there are "animal
spirits" as driving elements for a recession. "Animal spirits" could be confidence, uncertainty,
and pessimism. These "animal spirits" prevent objectivity and quantitative analysis Supply will
exceed the demands of products and goods. Events that hurt particular companies or industries
can also cause recession. Major innovations or change in a price of a major component needed in
the completion of the product can have dramatic effects on some firms. These may cause
reduction of workers or production.
Overconsumption can also be a cause of recession

. http://www.articlesbase.com/human-resources-articles/behind-the-hitch-the-causes-of-
economic-recession-2065887.html
7) :Benefits Of Economic Recession: How The
Economic Recession Has Improved Our Lives
Lee michael 2009 examined that The global economic downturn has certainly made life a little
difficult for many people. Many businesses have claimed bankruptcy and a lot of
employees have been retrenched. However, there are also benefits of economic recession
you might have overlooked. The worldwide economic crisis has opened up a lot of new
opportunities like Better Bargains the benefits of economic recession is that there are now
more bargains available everywhere., Better Budgeting and Better Perspective.

http://www.articlesbase.com/business-articles/benefits-of-economic-recession-how-the-
economic-recession-has-improved-our-lives-1178343.html

8) The Global Economic Crisis: The Impact On

Consumer Attitudes & Behaviors In India

Pandey anshul,2010 examined that survey of Indian respondents established that 55% either
'strongly' or 'tended' to agree with the statement he believe that his country of residence is in
a recession. However their relative conviction in this belief is lower than the global average
(69%). This reflects the greater optimism and growing financial and emotional satisfaction
among Indians as prosperity has increased. India's economy has demonstrated comparably
higher resilience in the midst of a worldwide slump and it also seems Indian consumers
recognize this. They are less likely to perceive that their lifestyle has changed in light of the
economic downturn with just over a quarter (26%) perceiving that their lifestyle has been
impacted by the recession

http://www.articlesbase.com/customer-service-articles/the-global-economic-crisis-the-
impact-on-consumer-attitudes-amp-behaviors-in-india-market
9) Economic Recession – Does history support Obama

stoyeck Richard 2009, examined that Unfortunately, when it comes to economic recession,
history becomes clouded based on your political beliefs. The question he wish to answer is
whether or not economic recessions and their severity have been at all shortened by the intrusion
of government into a country’s economic life. As it pertains to our current situation, the question
becomes whether or not President Obama and the Congress spending $800 billion in fiscal
stimulus will get the job done? Will it shorten the recession, or perhaps even make it worse? If
you listen to the politicians and the talking heads on television, I personally guarantee one thing,
they all lie and distort reality.to came out from recession obama’s govt has spent 120billion for
the development of the country.

http://www.articlesbase.com/personal-finance-articles/economic-recession-does-history-
support-obama-1201355.html

10) Global Economic Recession Stops Now?

Zoe, 2009 examined that The economic recession started in 2008 has put numerous countries'
economy into the stage of mess or collapsing. The most influenced business are online business,
foreign trade, real estate, and banks. Now, the crisis seems to be over and the world economy
seems to be recovering slowly. According to Reuter report, GDP in China increases 7.9% in the
second quarter of 2009, that number extends the previous expectations from outside. In
Shenzhen in this country, the prices of house increase stably in recent two months, compared to
the early of 2009. The number of employees demand rises, job seekers now have 2 or more job
options, according to local news.

http://www.articlesbase.com/international-business-articles/global-economic-recession-
stops-now-1093028.html
Conclusions
• Recession has a huge impact on Indian stock market.

• According to investors FII’S are the main factor in fluctuation in indices of

Indian stock market.

• Respondents basically invest their money for a short period of time .

• Respondents basically invest their money for a short period of time .
• They don’t have much knowledge of derivative market.

• They are not fearful regarding their deposits in any Indian bank.

• Indian investor have positive mindset regarding Indian stock market .

Recommendation
 SEBI must do something regarding FII’S.

 SEBI must take some steps to educate Indian investors so that they will
invest after doing proper fundamental & technical analysis of stocks.

 Investors must invest for long period and invest in various sector(portfolio
diversification) to minimize their risk.