Stock prices are determined by the marketplace based on the supply and demand at that point of time. Various outside factors, economic and non-economic events can have a huge impact on the performance of stocks and the overall market due to supply and demand imbalance.
In this article, we have discussed key events that can have a huge impact on the stock market.
Monetary policy
Monetary policy in India is controlled by the Reserve Bank Of India (RBI). The Reserve Bank of India controls the money supply by controlling the interest rate.
Every country has their own central bank to control the monetary policy.
If the interest rate of a country is high, it means the borrowing costs are high. Naturally, a higher interest rate will mean that companies will have to pay more for loans, resulting in lesser profits.
High borrowing costs will affect the growth of the corporate as they will not be willing to borrow funds. If corporations won’t grow, then the economy slows down.
On the other hand, if the interest rate of a country is low, then borrowing for corporations and the general public is easier. With more money in hand, corporations and public spending increases due to which sellers increase prices of various products. This might lead to high inflation.
Therefore while setting the interest rate, the RBI has to strike a balance between growth and inflation.
Here are three rates that traders and investors track;
- Repo rate
- Reverse repo rate
- Cash reserve ratio (CPR)
Any imbalance in these rates can impact the economy and the overall market.
Repo rate is the rate at which RBI lends money to banks. If the repo rate is high, it means the cost of bowing for banks is high. High cost of borrowing can lead to slow growth in the economy.
Reverse repo rate is the interest rate at which RBI borrows money from banks. If reverse repo rate is high, it means banks will be willing to lend money to RBI instead of corporates. This might result in a short supply of money for corporations, resulting in slow growth in the economy.
Cash reserve ratio is the amount that every bank is mandatorily required to maintain with RBI. If the Cash reserve ratio is increased, then banks are required to keep more money with RBI resulting in less supply of money to the market, which is not good for growth in the economy.
RBI reviews these rates every quarter. Market will be closely monitoring these developments to assess the impact on various sectors and the overall market.
Inflation
Inflation is the big picture. As the cost of goods and services rises, the buying power of the rupee falls. Inflation is the rate at which the value of rupee is falling and, consequently, the general level of prices for goods and services is rising.
High inflation erodes the purchasing power of money.
Increase in inflation tends to send a bad signal to markets.
Government role is very crucial towards cutting down the inflation to a manageable level.
Inflation is measured by using Wholesale price index (WPI) and Consumer Price index (CPI). If the index is going up by certain percentage points, then it indicates a rise in inflation. Similarly, falling indicates inflation cooling off.
WPI captures the price increase or decrease when goods are sold between organizations. It indicates the movement of price at the wholesale level. WPI measures inflation at an institutional level and does not capture the inflation experienced by the end consumer.
CPI captures the effect of the change in prices at a retail level.
Budget
Once in a year the finance minister of our country presents a budget to the entire country. It’s an annual event that takes place during the last week of February.
During this budget presentation in parliament, major policy announcements, tax rates and economic reforms are announced which can have a direct impact on various industries. Based on the announcement, the budget can play a very crucial role in the economy due to which it can impact a company’s profitability.
If investors and traders foresee a negative impact of the budget, then they might exit their current position as a result the market will fall.
Likewise, if investors and traders are seeing future growth due to the budget announcement, then they might purchase more shares due to bullishness on the market.
Corporate Earnings
This is the most important event for every investor and trader to know how the market will perform in future. Stock most of the time reacts to corporate earnings.
As per the present law, listed companies are required to declare their corporate earnings once in every quarter. From this earnings announcement market will know followings;
- How much money has the company generated?
- What is the growth in revenue in comparison to last quarter and year?
- How has the company managed expenses?
- How much profit the company has generated?
After the announcement of corporate earnings market participants compare it to their own estimation. If the company earnings are better than the expectation, stock price will go up. Likewise, if the results are below expectation, stock prices will fall.
In addition to the above key factors, the market also looks for an index of Industrial Production and Purchasing managers index. The index of industrial production is a short term indicator to show how the industrial sector in the country is progressing. The purchasing managers index captures the business activity across the manufacturing and service sector in the country.
There are so many factors that affect the stock market. If you analyze all these factors you will find the most basic factor that affects the stock market is an imbalance between supply and demand.
If a company can grow at the rate of 20% year on year, then everyone wants to buy shares of the same company, there will be huge demand for shares, with less supply and high demand of shares, market price will go up.
The opposite happens when you have many shares available for sale but no one wants to buy them. In this case supply goes up and demand comes down due to which the stock price will decline.
Here is a list of other key factors that can have impact on the stock market;
- Successful product launches
- Reduction in debt
- Political climate of the country
- Civil war or riots or terrorist attacks
- Natural calamities such as earthquakes and floods
- Exchange rates
Also Read: What to look for in the financial statements before investing in stocks
