The two effects of inflation are as follows
(i) Encourages Speculation Inflation promotes speculative activities in an economy. Traders make speculative investment on inventory stocks. It results in uncertainty, which is generated by continuously rising prices.
(ii) Impact on Foreign Direct Investment (FDI) Inflation threatens the flow of FDI (Foreign * Direct Investment). First, because it implies a rise in the cost of inputs and Second, because it implies a decline in purchasing power of foreign currency in the Indian markets.