Impact of inflation on the stock market of Pakistan

Abstract

Pakistan comes under the category of developing countries. Since independence Pakistan has been facing various economic problems that inhibit the economic growth of the country. The increasing population, political instability, inflation, poverty, unemployment, terrorism and many other such factors contributed in restraining the growth of the country. Among all the mentioned factors, inflation is the one that has been shed light upon in this study and its impact on solely the Karachi Stock Exchange (KSE-100 Index) is taken into the study. The increase in the price of goods/services leading to a fall in purchasing power is termed as inflation. The rate at which the prices are increasing over the year is known as the inflation rate. Inflation is considered to be an evil for the economy as it damages the economy of a country reducing its growth, economic activity and market development. The two main theories presented as the reason for inflation are demand-pull and cost-push inflation. In Pakistan inflation is considered to be a significant economic factor due to its high volatility. Increasing inflation has been a problem in Pakistan as it has resulted in suppressing the gains in output, income and employment and creates uncertainties for consumers, businesses and investors. The stock market is considered to be the backbone of the country as it plays an essential role in the economy of the country by providing a platform to the companies and investors to buy and sell their equity. A stable and strong stock market encourages growth in the economy as it enables the businesses to raise capitals, mobilizes the savings for investments, facilitates company growth, provides opportunities to small investors and allows profit sharing. However if the stock market of the country is unstable and weak, the whole economy of the country suffers and drastic results have been observed in the past by the crashing of the stock market. There are three major stock markets in Pakistan that are Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange. Karachi Stock Exchange (KSE) is the largest stock market of Pakistan. Although Pakistan stock market is smaller in size but it is very active comparing to other developing countries around the world.