Inflation is becoming a concern in India, and in other parts of emerging world. Here, we present an analysis for last 32 years for BSE SENSEX.
The above chart shows the three year real returns for Sensex adjusted for Indian CPI.
We have defined the three-year periods when the inflation exceeded previous 10-year inflation, as periods of high inflation and the remaining three-year periods as periods of low inflation.
We have further classified the same three-year periods as rising inflation or falling inflation period based on movement in one-year inflation in the one period starting from one quarter before the start of three-year period to first quarter of the three-year period. This is used as a proxy for estimating whether the inflation in the three-year period was expected or unexpected inflation. Thus, period of rising inflation are periods of unexpected inflation.
From the above quadrant analysis, it is clear that the periods of high inflation do not produce meaningful real returns for Indian Equities. Is it a conclusion to think over?