A market participant may not be able to transact based only on information specific to a company. Understanding the market's influences is important. Many outside factors, including economic and/or other events, have an important impact on the performance of stocks and markets in general.
This chapter will attempt to explain some of these events and how the stock market responds to them.
The Reserve Bank of India (RBI), which controls the money supply, uses monetary policy to control the interest rates. They do this by adjusting the interest rates. The RBI is India's central banking institution. Every central bank in the world is responsible for setting interest rates.
The RBI must strike a balance between inflation and growth when setting interest rates. The RBI must balance growth and inflation by setting high-interest rates. This is especially true for corporations. Corporates cannot borrow as easily as they can, and that will hinder their growth. The economy will slow down if corporations stop growing.
Borrowing becomes much easier when interest rates are low. This means that corporations and consumers have more money. Inflation is a result of increased spending and higher prices.
The RBI must balance all factors before it can set key rates. Uneven rates can cause economic chaos. These are the key RBI rates you should be tracking:
Repo rate -When banks need money to borrow, they can get it from the RBI. The repo rate is the rate at which RBI lends money out to other banks. A high repo rate means that borrowing costs are high. This can lead to slower economic growth. The repo rate currently in India is 8.8%. The RBI raising the repo rate is not popular with the markets.
Reverse Repo Rate - The rate at which RBI borrows money from banks is called the Reverse Repo Rate. Banks lend money to RBI because they know that RBI will not default and are therefore more likely to lend money to RBI than to a corporation. The banking system's money supply decreases when banks lend money to RBI rather than to corporate entities. A rise in the reverse repo rate is bad for the economy because it tightens the money supply. The current reverse repo rate stands at 7%.
The cash reserve ratio (CRR), Every bank is required to maintain funds with RBI. The CRR determines how much they can keep. The CRR can increase, and more money will be taken from the system. This is bad news for the economy.
The RBI meets twice a month to review rates. This is an important event that the market monitors. Interest-rate sensitive stocks in various sectors, such as banks, automobiles, housing finance, metals, and real estate, would be the first to react to rate changes.
Inflation refers to a steady increase in the prices of goods or services. Inflation can cause a decline in purchasing power and decreases purchasing power. If 1 kg of onion costs Rs.15 to Rs.20 more, this is an inflation-related price rise. Although inflation is inevitable, a high rate of inflation is not good for the economy. Inflation at a high level can send a negative signal to the markets. The government works to reduce inflation to a manageable degree. An index is used to measure inflation. An index measures inflation. If it goes up by a certain percentage point, it means that inflation is rising. Conversely, index falling signifies that inflation has cooled off.
There are two types: the Wholesale Price Index (WPI), and the Consumer Price Index, (CPI).
Wholesale Price Index - This index shows the wholesale price movements. It measures the price change or decreases when products are sold between companies, rather than to actual consumers. WPI is a convenient and easy way to calculate inflation. The inflation calculated here is at the institutional level and does NOT necessarily reflect the consumer's inflation.
As I type this, the May 2014 WPI inflation stands at 6.01%.
Consumer Price Index - The CPI measures the impact of price changes at the retail level. CPI inflation is the most important thing for consumers. CPI inflation is complicated because it involves dividing consumption into different categories and subcategories, both in urban and rural areas. Each one of these categories is converted into an index. The final CPI index is therefore a combination of many internal indices.
CPI calculations are very precise and thorough. This is one of the most important metrics to analyze the economy. The CPI numbers are published by the Ministry of Statistics and Programme Implementation, a national statistical agency. It is available around the 2 and weeks of each month.
For May 2014, the CPI stood at 8.28%. This chart shows the change in inflation over the past year in India.
You can see that CPI inflation has slowed down from its peak of 11.16% reached in November 2013. The RBI must find a balance between inflation rate and interest rates. A low interest rate tends to increase inflation while a high rate of inflation tends to stop it.
The Index of Industrial Production is a short-term indicator of the country's progress in industrial production. The Ministry of Statistics and Programme Implementation releases the data every month, along with inflation data. The IIP measures Indian industrial sector production using a fixed reference point. India currently uses the 2004-05 reference point. Also known as the base year, the reference point is also known as the base year.
About 15 industries submit production data to the ministry. The ministry then collates and releases the data as an index number. An increasing IIP indicates a healthy industrial environment, which means that production is rising. This is a good sign for the economy. A decrease in IIP is a sign of a slowing production environment. This is a bad sign for the economy.
To summarise, an increase in industrial production is good news for the economy. A decrease in industrial production rings alarm bells. The Index of Industrial Production has growing importance as India becomes more industrialized.
The RBI will have to reduce interest rates if the IIP number is lower. Below is a graph showing the percentage change in IIP over the past year.
The Purchasing Managers' Index (PMI), an economic indicator, attempts to capture business activity in the country's service and manufacturing sectors. This indicator is based on a survey. It measures how purchasing managers, who are usually the respondents, feel about their business's performance over the past month. For the manufacturing and service sectors, a separate survey is conducted. All data are combined into a single index. The survey covers a variety of areas, including new orders, output, business expectancies, and employment.
The PMI reading oscillates between 50 and 50. A reading of 50 or more indicates an expansion in the economy, while a reading below 50 is indicative of a contraction. A reading of 50 means that there has been no economic change.
A Budget is an event where the Ministry of Finance presents the country's finances in detail. On behalf of the ministry, the Finance Minister presents a budget to the whole country. Major policy announcements and economic changes are made during the budget presentation, which has a significant impact on various markets. The budget is an important part of the economy.
This is illustrated further by the fact that July 2014 was the month when the Finance Minister expected to raise the duties on cigarettes. As was expected, the Finance Minister increased the duties on cigarettes during the budget. This resulted in a rise in the price of cigarettes. There are a few consequences to an increase in the price of cigarettes:
ITC traded 3.5% lower as a result of the budget announcement.
Budgets are an annual event and are announced in the last week of February. The budget announcement may be delayed in certain circumstances, such as when a new government is formed.
This is one of the most important events to which stocks respond. All listed companies that trade on the stock exchange must announce their earnings numbers at least once a quarter. This is also known as the quarterly earnings numbers. The corporate will announce details about various operational activities during an earnings announcement.
Some companies also give an overview of what they expect for the next quarter. This is known as 'corporate guidance'.
Infosys Limited is the first blue-chip company that makes the quarterly announcement every quarter. They also regularly issue guidance. Informationsys' guidance has a significant impact on markets and is closely followed by market participants.
Below is a table that gives an overview of India's earning seasons.
Market participants compare quarterly earnings to determine what they think the company should have earned. The 'street expectation' is the expectation of market participants.
If earnings exceed street expectations, the stock price will respond positively. Similar logic applies to the stock price if actual numbers are lower than street expectations.
If actual numbers and street expectations match, stock prices tend to trade flat with more of a negative bias. This is because the company couldn't give any positive surprises.