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Chapter 6.4


Key Events and their impact on stock markets


# 1. Inflation

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. Inflation is the loss of purchasing power of the money. Eg. If Rajesh was able to buy 1KG fruits for Rs.100 before two months and now suddenly the price of same 1Kg fruits have become Rs.115 all other factors remaining unchanged then this is called Inflation.

Inflation is inevitable but a high inflation rate is not desirable as it could lead to economic uneasiness. A high level of inflation tends to send a bad signal to markets. Governments work towards cutting down the inflation to a manageable level. Inflation is measured by WPI (Wholesale price index) & CPI (Consumer price index).

WPI captures the price increase or decrease when goods are sold between institutions as against actual consumers. Since the inflation measured here is at an institutional level it does not necessarily capture the inflation experienced by the consumer.

CPI captures the effect of the change in prices at retail level. The calculation of CPI is relatively detailed as it involves categorizing consumption into various categories and sub categories across rural and urban regions. Each of these categories is considered into an index. So the CPI index is a work of several internal indices.CPI index is published every month by Ministry of Statistics and Programme implementation (MOSPI). This number has impact on the markets.


# 2. Gross domestic product (GDP)

Gross domestic product (GDP) is the monetary value of all the finished goods & services produced within a country’s boards in a specific period of time. GDP indicates the overall health of an economy.GDP calculation includes public as well as private consumption, government expenses, investments & export minus imports that occur in an economy. Its calculation formula is

GDP = C + G + I + NX
C=consumption in an economy
G=government spending in the economy
I=Total investments in the economy
NX =(Export –Imports) in an economy



# 3. Balance of payment (BOP)

Balance of payment is the record of all the transactions between a country & other world economy during a specific period of time. It is the account of a country’s international transactions. BOP account is broken into three categories namely current account, capital account & financial account.

Current account includes any exchange of goods and services between two countries. E.g. If India exports goods to U.S then the amount which U.S will pay for the goods are credited to India’s account & the same amount is debited from U.S BOP account.

Capital account records the capital going in & out of a country for capital investment purposes. E.g. If a U.S resident migrates to India the assets which he moves from U.S to India are credited to India’s BOP account & debited from U.S balance of payment account.

Financial account records the payment flow concerning to the change in the ownership of international financial assets & liabilities this could include direct, portfolio investment or reserved assets investments by the monetary authorities of the countries. Eg., If India invests into foreign securities of U.S then the amount invested will be debited from India’s BOP account & credited to U.S BOP account.

A country’s BOP figure should be ideally zero. The current account should balance with capital account plus financial account. But due to exchange rate fluctuation & economical disturbance idealistic situation is often not true. But this figure helps the country to identify any long term trend which could be disturbing to an economy. Current account deficit if a countries imports are more than its exports so the income to the country in foreign currency is less than its expenses in foreign currency and this negative difference between imports & exports is called current account deficit.

Balance of payment is the record of all the transactions between a country & other world economy during a specific period of time. It is the account of a country’s international transactions. BOP account is broken into three categories namely current account, capital account & financial account.


# 4. Index of Industrial Production (IIP)

IIP measures the production in the Indian industrial sectors. Ministry of Statistics and Programme implementation publishes this data every month. 15 different industries submit their production data to the ministry, which collates the data and releases it as an index number. If the IIP is increasing it indicates a vibrant industrial environment and therefore a positive sign for the economy and markets. A decreasing IIP indicates a slow production environment, thus a negative sign for the economy and markets.


# 5. Unemployment

When economy is in bad phase with less GDP & IIP numbers such as industrialization are sluggish the employment rate in an economy goes down. Thus increasing unemployment number is a negative indication about the economy’s progress & thus affects the investor sentiments & markets.



# 6.Monetary Policy


Every country has a central bank like Reserve bank of India (RBI) whose function is to create a balance between the Growth & inflation in the economy. RBI controls the money supply in the country by controlling interest rates.

How RBI maintains a balance between growth & inflation by controlling the interest rates is explained as follows:

a. If RBI raises the interest rates then the borrowings for the corporate becomes expensive if corporations don’t borrow then they cannot grow. If the corporations don’t grow the economy slows down.
b. If the RBI decreases the interest rate then the borrowings become cheaper for the corporate thus more money in the hands of corporations & consumers. With more money people tend to spend more & thus the suppliers increase the prices of the goods.

So RBI has to decide the interest rates in such a way to strike a balance between growth & inflation.

Some of the important rates which RBI decides in its quarterly review are as follows:

a. Repo rate: The rate at which RBI lends money to other banks is called the repo rate. If repo rate is high that means the cost of borrowing is high, leading to a slow growth in the economy.


b. Reverse repo rate: Reverse Repo rate is the rate at which RBI borrows money from banks. When banks choose to lend money to the RBI, the supply of money in system reduces. An increase in reverse repo rate is negative for economy as it tightens the money supply.

These rates are release by RBI on the quarterly basis and this is the key event which can have positive as well as negative impact on the markets

So RBI has to decide the interest rates in such a way to strike a balance between growth & inflation. Some of the important rates which RBI decides in its quarterly review are Repo Rate and Reverse Repo rate


Key Takeaways:

  • GDP growth is one of the important factors for emerging or growing economy like India. Increasing FDI and FPI is a positive measure which leads to growth in GDP.
  • Monetary policy helps control money supply in the economy so as to speed up and slow down growth.
  • Need to keep an eye on key macros such as GDP rates, Current Account Deficit, Fiscal Deficit and Monetary Policy as they affects market positively or negatively.

Next Course of action:

  • Visit Markets Overview for latest happenings in markets through News, Tweets, Videos, RSS feeds and more.
  • Get updated on the recent macro and micro trends in various sectors as well as Indian and Global markets by visiting Sector and Economy Reports
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