We all have at some point experienced volatility in the stock market with fluctuating share prices. But have you ever wondered what drives these fluctuations? There are various factors and events that affect the prices in the stock market directly or indirectly.
As a market participant, it is important to have more than just company-specific information as market volatility may be due to any of the company-related reasons and macroeconomic conditions. Some of the factors/events that impact the stock prices in India are listed below.
Events that have and will continue to affect the Indian stock market
Monetary Policies by RBI
RBI (Reserve Bank of India) is an apex institution that monitors the monetary policies of our country and controls the interest rates. However, the central bank has to maintain a balance between growth and inflation while setting these interest rates.
In simple terms, if the interest rates are high, borrowing rates are also high. This decreases the borrowing capacity of the corporations, which in turn slows down the economy. However, if the interest rates are less, borrowing rates are low. This results in more money in hand, leading to increased prices by the sellers causing inflation. The RBI has to consider all these factors to set interest rates without creating economic chaos.
Track below interest rates and witness their impact on the stock market:
The rate at which banks borrow money by pledging their securities to RBI in order to maintain liquidity or other statutory measures is known as Repo Rate.
Reverse Repo Rate
Commercial banks deposit surplus funds with the RBI at a favorable rate, this rate is known as the reverse repo rate.
Cash Reserve Ratio (CRR)
CRR is a percentage of a bank’s total deposit that it has to mandatorily maintain with RBI.
As we already know the government announces major economic reforms during the budget which are likely to impact various industries in the market. Let’s understand the impact of budget in the stock market with an example. Say, there is a Company Y that produces product X and has a significant percentage in the index. If the price of Product X increases:
It will discourage consumers from buying the product that will lead to a decrease in profitability of Company Y, thereby, wanting investors to sell their shares
When investors start selling their shares of Company Y, the share price will decrease
Some of the examples of the budget reforms that affected the stock prices in India are:
Waiver of farmer loans impacted the Banking/NBFC (Non-banking Financial Company) sector which in turn affected the stock market
An increase in capital expenditure by the government in the infrastructure sector positively impacted multiple industries, leading to large-scale employment and the growth of the economy
Government Policies & Political situations
In India, government policies have a significant impact on the economy as well as businesses. Based on the country’s current and economic market conditions, the government constantly implements new policies or alters the existing ones. This definitely affects the prices of the stock. For example, if the government increases its share of subsidies for any particular industry, it may directly impact the stock market.
Apart from the policies, the political climate of the country also affects the stock market. If the public sentiment is not positive for the current government, the prices of listed stocks will go down and vice versa. Several events that have impacted the stock market in India are:
The stock market grew up when market sentiment was positive
When the election results were as per the market expectations, the stock market witnessed a brief high. This was because the market believed that the positive results will fast-track reforms that in turn will accelerate the economy.
Demonetization decreased the purchasing power of consumers. This impacted the sale of various industries like real estate, automobile, cement, steel, and more resulting in the fall in the stock prices of the company. As per reports, the week after the demonetization was announced, Nifty 50 registered a 5.1% fall in the daily closing price as compared to the closing price on the date of the announcement.
In 2019, a landmark decision was taken by the government of cutting the corporate tax. The BSE index registered its biggest gain since 2009 with a jump of 5.03% when the corporate tax rate was slashed to 22% from 30%. This step was taken in order to reignite the country’s economy.
Natural disasters such as earthquakes, floods, droughts, and more not only affect our lives but also the market. It impacts the company’s performance as well as the capacity of consumers to spend money. This results in lower sales and lower revenue, thereby, hitting the economy and the stock market. One such global pandemic that shook the economy is COVID-19. In the initial days of COVID-19, the market was under fear as there was uncertainty. For example, the closing price for NIFTY 50 was 7601.25 on 23rd March 2020, compared to 11303.30 on 03rd March 2020. To know more about its impact on the stock market, click here.
Factors that affect the Indian stock market
Regulatory Policies by SEBI
SEBI (Securities and Exchange Board of India) is a regulator that watches the entire activities of the Indian stock market. Any changes in the trading and/or investment policies by SEBI will move the stock prices in India. For example, Peak Margin introduced by SEBI in a phased manner to reduce market volatility impacted the stock market
Inflation means the continual increase in the prices of goods and services over time. If the inflation rate is high in the country, it discourages investors from investing in the stock market. This is because the fall in the value of money results in a decrease in the value of savings, thus, reducing the buying capacity as well as investing power of a customer.
Inflation is measured via an index. If the index grows up after a certain limit, it means inflation is rising and vice versa. Two types of inflation indices are:
Wholesale Price Index (WPI)
It indicates the increase or decrease in the price at the wholesale level that means the price at the producer’s and trader’s level. WPI is measured at an institutional level.
Consumer Price Index (CPI)
It identifies the movement in prices of the essential products and services used by the consumers over a period of time. For the purpose of calculating CPI, consumption items are classified into various categories which means the CPI index is the composition of different internal indices.
Corporate Earnings Announcements
The companies listed on the exchange have to declare their earnings, profit, taxes paid, and more on a quarterly basis. It is highly valuable as it shows the financial status of the company and the market reacts to it on the basis of this information.
‘How do events or factors affect the stock market?’ has been a question among the investors. When you get deep into the subject, you will understand there is no formula or a single rule to explain this. Be it political, social, economic, or any other, every event has a direct or indirect impact on the stock market. Hence it makes sense to understand these events in a little detail as an informed investor.