A market participant may find it insufficient to make decisions solely on the basis of company-specific information. Understanding the events that affect the markets is also crucial. The performance of stocks and markets as a whole is significantly influenced by a number of external factors, including economic and/or non-economic events.
Following are the external factors that affect stock market:
The Reserve Bank of India (RBI) uses monetary policy as a tool to manage the money supply through regulating interest rates. They adjust interest rates to do this. RBI is India’s central bank. The central bank of every country in the world is in charge of deciding on interest rates.
The RBI must achieve a balance between growth and inflation while determining interest rates. Simply put, if interest rates are high, borrowing costs are also high (particularly for corporations). Corporations cannot expand if borrowing is difficult. If businesses don't expand, the economy sputters.
On the other hand, borrowing is simpler when interest rates are low. This results in more money in the pockets of businesses and customers. With more money comes more spending, which causes retailers to raise prices, which causes inflation.
The RBI must carefully select a few key rates and take into account all the variables in order to achieve balance. Economic chaos can result from any inequity in these rates. The following are the important RBI rates that you should monitor:
Repo Rate - Banks can borrow money from the RBI whenever they need to. The repo rate is the interest rate at which the RBI loans money to other banks. The cost of borrowing is high when the repo rate is high, which causes the economy to grow slowly.
Reverse repo rate - The rate at which the RBI borrows money from banks is known as the reverse repo rate. Banks are happier to lend money to RBI than to a corporation since they are confident that RBI won't default when they do so. However, the amount of money available in the banking system declines when banks decide to lend money to the RBI rather than a corporate organization. Reverse repo rate increases tighten the money supply, which is bad for the economy. The current reverse repo rate is 3.35%.
Cash reserve ratio (CRR) – Every bank is required by law to keep money on deposit with the RBI according to the cash reserve ratio (CRR). The amount that they maintain is dependent on the CRR. The economy will suffer if CRR rises because more money would be withdrawn from the system.
Every two months, the RBI meets to discuss rates. The market keeps an eye out for this important occasion. Interest-rate-sensitive stocks from a variety of industries, including banks, automobiles, housing finance, real estate, metals, etc., would be the first to respond to rate choices.
A consistent rise in the average cost of goods and services is referred to as inflation. The value of money decreases as inflation rises. If everything else is equal, inflation is to blame for the price increase if the price of 1 kg of tomatoes went from Rs. 20 to Rs. 40. Although inflation is unavoidable, a high inflation rate is not preferred because it could cause economic instability. A high inflation rate typically sends markets the wrong message. Governments strive to bring inflation down to a tolerable level. An index is typically used to calculate inflation. When the index increases by a specific percentage point, there is rising inflation; when the index decreases, there is cooling inflation.
There are two types of inflation indices – Wholesale Price Index (WPI) and Consumer Price Index (CPI).
Wholesale Price Index (WPI) - WPI, or the wholesale price index The wholesale price index, or WPI, tracks changes in wholesale pricing. It tracks price changes when goods are traded between businesses rather than with actual buyers. WPI is a simple and practical way to compute inflation. The inflation that is being measured here, however, is institutional and may not accurately reflect consumer inflation.
The WPI inflation rate for September 2022 is now 8.08% as of this writing.
Consumer Prices Index (CPI) - The CPI, on the other hand, accurately measures the impact of changes in retail prices. CPI inflation is what matters most to consumers. Since consumption in both urban and rural areas is divided into numerous categories and subcategories, the CPI calculation is highly complex. An index is created for each of these subcategories. This indicates that a number of internal indices are combined to create the final CPI index.
The CPI is calculated in a very precise and thorough manner. One of the most important metrics for analyzing the economy is this one. The Ministry of Statistics and Programme Implementation (MOSPI), a national statistical organization, releases the CPI figures around the second week of each month.
Index of Industrial Production (IIP)
The Index of Industrial Production (IIP) is a short-term indicator of how the country’s industrial sector is progressing. The Ministry of Statistics and Programme Implementation (MOSPI) releases the information each month, along with data on inflation. The IIP, as its name suggests, evaluates production across all industrial sectors in India while maintaining a reference point.
The ministry receives production data from around 15 different industries, compiles it, and then publishes it as an index number. If the IIP is rising, this is a good indicator for the economy and markets since it denotes a dynamic industrial environment (as production is rising). A declining IIP is a negative sign for the economy and markets since it denotes a sluggish production environment.
Purchasing Managers Index (PMI)
The Purchasing managers’ index (PMI) is an economic indicator that tries to capture business activity across the country’s manufacturing and service sectors. This is a survey-based indicator where the respondents – usually the purchasing managers- indicate how their perception of the business has changed over the past month. Each sector—manufacturing and services—receives a separate survey. The survey's statistics are compiled on a single index. New orders, output, business expectations, and employment are typical survey topics.
The PMI reading often fluctuates around 50. An economic expansion is indicated by a reading above 50, and a contraction is indicated by a reading below 50. Additionally, a reading of 50 shows no change in the economy.
A Budget is an event during which the Ministry of Finance discusses the country’s finance in detail. The country as a whole is presented with the budget by the Finance Minister on behalf of the ministry. The budget contains significant economic and policy statements that have an impact on a range of market sectors and industries. Consequently, the budget is essential to the economy.
Corporate Earnings Announcement
Perhaps this is one of the important events to which the stock market reacts. Every quarter, the listed companies (all those who trade on the stock exchange) are required to release their earnings numbers, also known as the quarterly earnings numbers. During an earnings announcement, the corporate gives out details on various operational activities, including:
How much revenue has the company made?
How has the business handled its expenses?
How much money was spent by the business on taxes and interest fees?
What was the quarter's profitability?
Additionally, some businesses include a summary of what they anticipate for the next quarters. This forecast is called ‘corporate guidance’.
When a company announces its earnings each quarter, market participants compare those figures to what they estimated. The market participant’s expectation is called the ‘street expectation’.
If the company's results beat street expectations, the stock price will increase. According to a similar reasoning, if the actual numbers fall short of the street expectation, the stock price will decline.
The stock price typically trades flat with a negative bias when the street expectation and actual numbers are in line. This is primarily due to the company's inability to deliver any positive moments.
Election seasons are among the most unpredictable times for the stock market since they are accompanied by a great deal of uncertainty. Political developments like elections or policy shifts have a significant impact on the stock market, just like economic changes do. It is commonly accepted that the stock market increases when the election results favor the current administration since it denotes political stability, and vice versa.
The price of numerous commodities is impacted by changes in crude oil prices. Companies are impacted by changes in commodity prices.
Following are some explanations of how crude oil prices affect the Indian stock markets:
- Current Account Deficit (CAD) and Rupee depreciation:
The current account deficit rises by 0.55%, or 55 basis points, for every U$10/bbl increase in oil prices. One of the most significant commodities in recent years is crude oil. One of the biggest oil importers in the world is India. More than three-fourths of its oil requirements are imported. Therefore, a decrease in crude oil prices will be beneficial for India's current account deficit scenario. Less CAD means less pressure on outflows of foreign money. This might therefore cause the rupee to appreciate. Imports become more affordable as the rupee's value rises.
- An increase in production costs:
The price of crude oil has a significant impact on businesses including tyre, lubricants, logistics, footwear, refineries, and airlines. Additionally, lower crude oil prices will assist goods like paints. This is because the majority of modern paints are oil-based. The input costs for making these products are impacted by a decline in crude oil prices. Therefore, a decline in crude oil prices benefits the stocks of these companies.
- An increase in transport cost:
The cost of shipping goods is impacted by changes in crude oil prices. The cost of consumer durables is significantly influenced by the price of crude oil. These goods are produced at industrial facilities before being distributed throughout different Indian towns. The final price of these commodities will decrease as the logistics costs decrease. Consumer good prices falling increases demand, which in turn increases stock prices.
Understanding US Fed rates change and Indian markets.
When interest rates are raised in the US, markets all across the world are impacted, not just those in India. Firstly, rate increases because foreign investors withdraw their money from Indian stock markets since such markets become much less attractive to them.
Secondly, a rise in interest rates would make the rupee less valuable in relation to the dollar. Again, this would lead to lower investment returns for international investors.
Thirdly, while long-term foreign investors won't be alarmed by slight rate increases, short-term investors would undoubtedly pull back since market volatility and a lower rupee force them to hedge their holdings, reducing the rewards.
Fourth, not to mention the immediate effect that higher interest rates have had on borrowing costs.
Those were the overseas investors, However, the RBI and Indian investors are undoubtedly keeping an eye on the US Fed rates as well.
Similar to how US Fed rates are largely determined, Indian monetary policy is decided by a separate organization. The RBI has preserved a sufficient amount of foreign exchange reserve to counteract the massive outflows of foreign investment that followed a rate hike in the US. And if the Reserve Bank of India still determines that interest rate cuts are necessary, it makes provisions for them, boosting retail involvement right away.