SENSITIVITY OF ACCOUNTING INFORMATION TO INFLATION RATE - A CASE STUDY OF INDIAN BANKS

Abstract

The purpose of this paper is to assess such sensitivity of sales and profits of banks to inflation rate. To study how inflation affects accounting information, an exhaustive sample of 35 banks is taken which includes PUS banks, private sector banks as well as foreign banks. Using a panel data of sales, operating profit and PAT of these banks over the study period vis-a- vis the WPI, attempt is done to capture the sensitivity of reported accounting information of banks to inflation (WPI). The method applied is simple linear regression. The paper begins by presenting descriptive statistics of WPI over the study period (2006- 07 to 20015-16) and the descriptive statistics of ‘Sales’, ‘Operating profit’ and ‘PAT’ of the sample. The results of simple linear regression show that sales and PAT of banks are significantly affected by inflation but operating profit is not. Recommendations based on analysis are made to the banks.