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 gen-erated 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 jn the Indian markets.