Inflation & Equity Markets

India’s wholesale inflation eases to 29 months’ low in March.

Yogesh Supekar discusses the correlation between inflation and equity returns while highlighting which sectors to focus on during inflationary environment.
 

The interplay between inflation and equity markets is not as straightforward as one would like it to be. In reality, the relation between inflation and equity market returns is much more complex. If consistent inflation is bad for equity market returns, how come the BSE Sensex had a dream run starting in 2003 running up to 2008 till the global financial crisis hit us? BSE Sensex jumped from ~3,300 in January 2003 to ~19,600 levels in January 2008 when the inflation skyrocketed from 3.81 per cent in 2003 to 8.35 per cent in 2008. We can see that the five years of consistent rising inflation saw stock prices almost multiplying in a similar period.