The effect of inflation rate and exchange rate towards FBM KLCI

A stock market performs a number of important roles in the economy. Normally investor look up at Kuala Lumpur Composite Index to see whether the stock market doing well or not. It indicates the way of the economic path face by the country. When the economic doing very well, it will reflects highest indices vice versa shows decrease indices in the economic downturn. The performance may be influence by many factors, relation with economics of views and perspectives. It may be cause by inflation and exchange rate. For certain investors the movement of KLCI will give initial signal to them to make better investment decision. Malaysian economic growth also can be roughly to be said in a good or bad condition by refer to this indices. This study seeks to investigate the response of KLCI towards inflation rate and exchange rate. The timing of research taken was in range of five years makes use of monthly data ranged from January 2006 to December 2010. The study will be used regression method to see the relationships between dependent and independent variables. The dependent variable of the study is the Kuala Lumpur Composite Index (KLCI). Two independent variables were selected and identified namely as inflation rate (CPI) and exchange rate. Both inflation and exchange rate shows negative relationship with stock prices. It is note specifically that movements in Malaysian stock market are driven by more domestic macroeconomic factors. The negative relationship between exchange rate and stock prices meaning that Malaysian economy is highly dependent on international trade. Whereas the negative relationship between inflation and stock prices indicates that equities cannot be a good hedge against inflation.