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Recently the Nifty crossed the 10,000 mark for the first time. At the same time inflation in India is falling. My question is whether the fall in inflation in India one of the reasons for the Indian stock market doing well?

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Back to economy basic 101: Inflation is due to excessive cash chasing limited goods.

So to relieve monetary inflation, an institution can only do either or all of this:

  1. Slow down money printing
  2. Find ways to produces goods/needs/services that absorb the money
  3. Enact policies to make people stash the excess cash, e.g. high-interest long term bonds, tax incentive on saving.

Other claims just typical media noise.

So "Is falling inflation in India one of the reasons for the Nifty crossing the 10,000 points mark?"

The answer is No.

No government can uplift market speculation by reducing money. The good news is, India stock market cross the 10k mark is because more hot money(inflated money) is entering the stock market. When excessive cash is snapped up in the stock market, there is little room for the cash to "chase" for the factors that cause goods price hikes, e.g. rents, raw material.

Thus, in a country with poor institutional control, stock rallies are extremely dangerous. Once the speculator cash out their profits from stock market, they may switch attention to other more profitable speculation, e.g. real estate.

Unless the country production sustains continuous growth (rule no 2) to absorb the overflow cash, otherwise you will see a repetition of 1997 Asia financial crisis.

Perhaps OP should ask, can Nifty dodge the fake of (East) Asia financial crisis and take the path of China (which thousands billions export surplus offset the inflation).

(update) As in economics study, one must be very careful to distinguish between noise and facts. IMHO, all market analytical tools are noise, not facts. That's why real investor like Warren Buffet simply ignore "market analytical tools" and went straight to costly and time-consuming facts digging.

To learn the bubble is outside the scope of the question. But just a hint, IMHO, index stocks are the best anchor to check against bubbles.

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  • $\begingroup$ So, is there any relationship between inflation and stock market rise/fall? like directly or inversely proportional...or is there no relationship at all?.....Now that you have mentioned that the rise in sock market indices is due to the fact that inflated money is being invested in the stock market, would receding inflation mean that stock market indices would fall.... ? $\endgroup$ – Soumee Aug 1 '17 at 19:58
  • $\begingroup$ @Soumee See above 3 factors that mitigate inflation. They are directly co-relate and causation of any bubble (rise and burst). Rest of the claims from media is anything but hindsight bias. $\endgroup$ – mootmoot Aug 2 '17 at 8:20
  • $\begingroup$ I was onboard with this answer until I read your phrase that "all market analytical tools are noise, not facts," which deserves some sort of justification besides Warren Buffet not using them. The statement as is, is too subjective/normative. $\endgroup$ – Kitsune Cavalry Sep 1 '17 at 13:52
  • $\begingroup$ @KitsuneCavalry Unfortunately, there is no funded research to show that any "market volatile analytical tools" are useful. So I just use simple deduction logic to make this conclusion : if analytical tools are so useful, why there is many failed funds? Why not a single fund manager able to proof a tools that can give consistent results? $\endgroup$ – mootmoot Sep 1 '17 at 14:36
  • $\begingroup$ You're asking for a proof of something too broad. What is being proved? That a mathematical model someone uses closely reflects real outcomes? I'm highly skeptical that there are simply no "proofs" people have made for these. You can argue that whether a tool is shown to be useful is down to interpreting what "useful" is, but you can also make that same argument for all of economics. $\endgroup$ – Kitsune Cavalry Sep 1 '17 at 14:45
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The indiatimes.com article you linked over on Skeptics lists inflation among a list of causes. That article claims that:

  • Investors are happy about tax reform
  • Small investors are investing more
  • Liquidity from institutional investors both domestic and foreign is high
  • Consumer inflation is low (1.54 percent, the lowest since 2012)
  • Expectations of interest rate cuts (apparently the market expects a rate cut in August 1-2 monetary policy review)
  • And a possibly politically biased (I have no basis to check this) - the article claims that the victory of BJP also helped the rally

If the article is correct, yes, one of the causes is the low level of consumer inflation.

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