Inflation Effect of GDP on Economy and Stock Markets

how does gdp effect on economy and stock markets

World over, Stock markets do not operate in a vacuum, there are many driving forces which push up or pull down the stock markets. The major driving forces are corporate earnings, GDP, and the political environment. GDP of a country has substantial leverage on corporate earnings. Thereby, if GDP Growth is slow then corporate earnings remain sluggish. Whereas if GDP Growth is high then the corporate earnings remain buoyant. Consequently, GDP and stock markets all together enjoy “choli daaman ka sath”. Apparently, to learn the language of stock market progressively, one should also acknowledge GDP.

Understanding Gross Domestic Product (GDP)

what is gdp

Gross Domestic Product or GDP is an economic term. In general terms, GDP is defined as the total amount of goods and services produced by a country at a given period. GDP is driven by several factors. For instances interest rates, inflation, govt. policies or central govt. budgets, state govt. budgets, taxation, and stimuli, etc.’

Inflation’s Impact on Stock Returns

Inflation is very interesting to be discussed. Inflation is when the prices of an article or prices of a set of articles increased in inflation. The rise in inflation is gauged by the rise or fall in CPI (Consumer price index) and WPI (wholesale price index).

There is a misconception that inflation is a villain in any economy. Zero inflation or deflation is dangerous compared to high inflation is an economy. Reserve Bank of India (RBI) consistently take measures to keep the inflation at an ideal level. Many times steps taken by the RBI to combat inflation are not adequate, in that scenario returns rate of domestic savings is less than the inflation and domestic saver suffer a notional loss. To win over the inflation domestic saving are channelized to stock markets although stock market returns are risky higher compared to fixed return Financial like bank FD etc.

Thus, stock markets do not operate in a vacuum. An investor invests in stock markets for the accrued benefits of corporate earnings, to beat the effect of inflation, to expect higher returns over savings in banks and of course for tax benefits to stock investing.

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