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If you are a budding and a keen investor, you need to know what parameters your analysis and research should be based upon. Before deciding on your next trade, one needs to count all the company-related and external factors. It gives a better idea of the market movements. It helps an investor know all events that can influence the price and its impact on the market movements.
The External Major events that can affect the market are as below:
Monetary Policy
The monetary policy of any country can affect market prices significantly. The monetary policy states the use of financial instruments under the control of RBI to standardize the availability of credit, interest rates, money supply to reach the ultimate objective of economic policy.
The three objectives of the monetary policy of the Reserve Bank of India (RBI):
(1) Price Stability or Control of Inflation
(2) Economic Growth
(3) Exchange Rate Stability.
Reserve Bank of India (RBI) uses this tool to control the money supply by controlling the interest rates. They do this by changing the interest rates and maintaining a balance between growth and inflation. Every country’s central bank is responsible for fixing these interest rates.
How does RBI policy affect stock market?
High-interest rates mean the borrowing rates are high (for corporations). High-interest rates for corporates make it difficult for them to borrow easily and grow economically. If corporations do not grow economy slows down.
On the contrary, Low-interest rates mean borrowing becomes easier for corporations and consumers. With more borrowing potential, the sellers can spend more and are more likely to increase prices which further causes inflation.
Thus, to avoid the above situations, the RBI considers all the factors and sets a few key rates, such as Repo Rate, Reverse Repo Rate, Cash Reserve Ratio, etc. It helps RBI to maintain the balance between growth and inflation. Any imbalance in these rates can disintegrate the economy.
Key RBI rates that you need to track are as follows:
Repo Rate – The rate at which RBI lends money to other banks is called the repo rate. A high repo rate means the cost of borrowing is high. This leads the economy to grow at a slow pace. Currently, RBI has kept the repo rate unchanged at 4 percent. RBI increasing the repo rates is not good news for the banks.
Reverse repo rate – Reverse Repo Rate is the rate at which the RBI borrows funds from the commercial banks in the country. Due to excess liquidity in the market, the banks benefit from the reverse repo rate by receiving interest for their holdings with the central bank. In return, the RBI offers attractive interest rates to them. However, when banks lend money to the RBI instead of the corporate entity, the banking system’s money supply reduces. An increase in the reverse repo rate is not good for the economy as it tightens the money supply.
Cash reserve ratio (CRR) – CRR is the number of funds that all the banks have to maintain with RBI. The number of funds they keep depends on the CRR. If CRR increases, banks need to keep more funds with the RBI. And that amount of money is removed from the system, which is not very good for the economy.
Inflation
Inflation is a multidimensional concept and another factor affecting the share price. It represents an increase in the prices of commodities and services in any market. It erodes the purchasing power of money and harms the money value. Thus it affects the stock market prices significantly. Inflation is usually measured using the following index values: Inflation is usually measured using certain index values.
Wholesale Price Index (WPI)
WPI is the average change in price in the sale of goods in bulk quantity by the wholesaler. It indicates the impact of variation in prices at the wholesale level and thus is not a good indicator of prices at the consumer level. An upward surge in the WPI print indicates inflationary pressure in the economy and vice versa.
Consumer Price Index (CPI):
For a consumer, CPI is what matters. It is a better indicator than WPI as it indicates the impact of change in prices at a consumer level. It is the weighted average of the prices of a select few consumer goods and services.
Calculating CPI is quite detailed as it is one of the crucial metrics for studying the economy. CPI calculation includes classifying consumption into various categories. Each of these categories is made into an index. Thus, the final CPI index is a composition of several internal indices.
A higher CPI could mean inflation and a lower CPI, deflation.
Index of Industrial Production (IIP)
As the name suggests, the IIP measures the Indian industrial sectors’ production, keeping a fixed reference point. As the production levels and rates vary in various industries, IIP determines the increase or decrease in stock market prices. IIP is an index calculated by taking the cumulative value related to the production of 15 select industries. When the indication is of a better production rate, it shows that the economy is in a good phase and, if the IIP is low, it indicates the bad phase of the economy.
How the economy affects the stock market when the index is low?
Just like the basic economic rule, a fall in the rate of production naturally causes more demand which will shoot the prices up. This will be directly reflected in the stock prices. When the index becomes lower, a slow-moving production environment is created, and this is a negative sign for the economy and markets.
If the IIP is increasing, the production levels are high and this indicates a vigorous industrial environment. Hence, a positive sign for the economy and markets.
Purchasing Managers Index (PMI)
The Purchasing Managers Index (PMI) is an economic survey-based indicator. PMI tries to capture business activity across the country’s manufacturing and service sectors. It measures the business conditions and its contributing factors like business output, new orders, employment, costs, selling prices, exports, purchasing activity, supplier performance, backlogs of orders, and inventories of both inputs and output, etc.
A separate survey is conducted for the service and the manufacturing sectors. The data from the survey are consolidated on a single index. Typical areas covered in the survey include new orders, output, business expectations, and employment.
Budget
A budget is an annual event. A Budget is an event during which the Ministry of Finance discusses the country’s going forward finance plan in detail. During the budget, major policy announcements and economic reforms which impact various industries across the markets are made. Therefore, the budget plays a vital role in the economy as any tweak in the budget may directly affect the economy and the market.
As a demonstration, let us consider, in the budget, an announcement is made to increase duties on any commodity, say on liquor. The liquor prices will shoot up. How will it affect the economy?
The increased liquor prices may make the buyers think twice to buy liquor, and hence the profitability of the liquor manufacturing companies may fall. If the profitability decreases, the market of that company gets affected. And the investors may want to sell shares of that manufacturing company. If market participants start selling, then the market will come down.
Corporate Earnings Announcement
It is also an event most investors look forward to as stock also behaves according to it. The listed companies are needed to declare their earning numbers once in every quarter. It is the declaration by corporates at the end of every quarter of the year. During an earnings announcement, the corporates disclose details on various operational activities like,
The revenue of the company during the quarter
The expense of the company during the quarter
Taxes and interests paid during the quarter
Profitability during the quarter
Besides, some companies give an overview of what they expect from the upcoming quarters. This forecast is called corporate guidance.
Such information is valuable as it shows the financial status of a company.
Investors compare the information with the previous quarter or with the same quarter of the last year. If the information given reveals that the financial health is improving, it attracts investors and the stock prices immediately go up.
The stock price will react positively if the company earnings are better than street expectations. On a similar logic, the stock price will react negatively if the actual numbers are below the street expectation.