Author(s) :

Nikhil Tiwari.

Volume/Issue :

Abstract :

Inflation — the general rise in prices — is a critical macroeconomic factor affecting investment returns and decisions. In India, consumer price inflation has recently moderated to around the RBI’s 4% target (averaging ≈4–5% in 2024)data.worldbank.orgfocus-economics.com, but historical volatility has been high (e.g. October 2024 CPI 6.2%, highest since Aug’23livemint.com). Inflation erodes real returns: for example, over the past decade India’s average inflation was ~5.2%, turning a 12% nominal equity return into only ~6.8% real, and a 7% fixed deposit return into just ~1.8% realeconomictimes.indiatimes.com. However, empirical analyses show that inflation by itself has only a weak direct effect on equity pricesijrpr.comijrpr.com; instead, stock markets are more sensitive to interest rates, monetary policy, and investor sentiment. Moderate inflation (2–4%) often coincides with robust market performanceresearchgate.netijrpr.com, whereas high inflation spikes have historically triggered market corrections and shifts to safe assets (“flight to safety” into gold and bonds)ijrpr.com. This report reviews recent Indian data and research, using CPI trends (RBI/MoSPI), equity and bond returns, and investor surveys to analyze inflation’s impact. We apply both quantitative (correlation/regression) and qualitative (sentiment analysis, case studies) methods. Key findings include: (a) portfolio strategies should emphasize inflation hedging (e.g. inflation-indexed bonds, real assets) and sector rotation (favoring essentials and dividend-paying stocks)researchgate.neteconomictimes.indiatimes.com; (b) fundamental analysis (which explicitly accounts for inflation and interest ratesinvestopedia.cominvestopedia.com) and technical analysis (monitoring market trends and sentiment) can both inform timing decisions; (c) investors must focus on real (inflation-adjusted) returns, and policymakers should strengthen inflation-targeting frameworks and expand inflation-linked instrumentseconomictimes.indiatimes.comeconomictimes.indiatimes.com. The report concludes with tailored recommendations for individual investors, financial educators, and policymakers, aiming to preserve purchasing power and improve investment outcomes in India’s evolving economic environment.

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