THE RELATIONSHIP BETWEEN STOCK RETURNS AND INFLATION IN INDIA: AN EMPIRICAL ANALYSIS

Abstract

In this study, the link between stock returns and inflation in India is investigated. Specifically, the study explores how changes in inflation rates effect the performance of the Indian stock market with regard to stock returns. The purpose of this study is to discover patterns and relationships between inflation and stock returns across a variety of sectors of the Indian economy. This will be accomplished via the utilization of an empirical analytic method that makes use of time-series data spanning many decades. The research makes use of several important econometric tools, such as regression analysis and cointegration techniques, in order to conduct the analysis of the data, which guarantees the reliability of the conclusions. The research investigates the short-term and long-term effects of inflation on stock returns, taking into account the impact of a variety of factors like interest rates, currency rates, and economic growth. The findings point to a complicated link, in which increases in inflation can have both a positive and a negative impact on stock returns, depending on the economic conditions that are currently in place. An excessive amount of inflation, on the other hand, has a tendency to reduce returns due to greater uncertainty and higher costs of capital. The findings show that moderate inflation may be associated with higher stock returns, while excessive inflation tends to erode profits. This research highlights the relevance of inflation in determining the performance of the stock market in India, which gives investors, policymakers, and financial experts with significant information that can be used to make future investment decisions. In addition, the study argues that it is essential to have a solid grasp of the dynamics of inflation and stock return in order to make educated judgments on investments in the Indian setting.