Stock Market is a true reflector of the state of economy of the country. Any event or any data which relates to the health of Government’s economic condition is extremely crucial for the Stock Market. Since the state of economy of the country has high correlation with sovereign credit rating by the international rating agencies, and since the credit rating of the country is linked with foreign investments in the country, Stock Market welcomes any move by the Government or any macro economic data or any event which signifies the improvement of Government’s financial health even if it goes against the public interest and rejects any data which signifies weakening of Government’s financial health.
Dear Readers, this is not any complex study material of economics. Let us understand, in simple terms, some important macroeconomic aspects which are important to the Stock Markets.
INFLATION
Inflation is an increase in the average level of prices for goods and services. In other way, we can say it is an index, which shows how prices of goods and services that is representative of the economy as a whole are growing. The immediate effect of inflation is that value of rupee decreases. That means the purchasing power of your ‘money’ decreases. If you want to understand it better, consider the below example.
On 31st December 2011, price of 1 kg rice is Rs 25.
If inflation rises 10% annually (i.e. if inflation throughout the year is 10% – for example) – then the price of 1 kg rice after 1 year (i.e. on 31st December 2012) will be Rs 25 + 2.50 = Rs 27.50. That means you need Rs 27.50 to buy the same 1 kg rice after 1 year just because inflation is 10% annually. In other words, you can’t buy the same 1 kg rice with your Rs 25 money anymore, which you could buy in the year 2011 i.e. purchasing power of your ‘money’ has reduced.
So, the rise in inflation rate gives us an idea that price of goods and services is increasing; purchasing power of money is decreasing, and supply of money is increasing so the demand for money is decreasing and supply of commodity is decreasing so demand for commodity is increasing.
There are many factors which control the rate of inflation. A very important aspect is price of Crude Oil in the International Markets. Since our country has excess demand of mineral oil than its supply, we have to import huge amount of crude oil (almost 70% of the demand) to meet the domestic requirement. If international crude oil price increases, our major Oil Marketing Companies (OMC) like IOC, HPCL and BPCL have to import crude at a higher price. It results in erosion of our dollar reserves, widening of Current Account Deficit, deepening of Trade Deficit and the OMCs have to incur huge losses. OMCs buy the crude oil at higher price in the international markets but they cannot increase the selling price of refined petroleum. Government of India gives huge subsidy on refined petroleum products like Petrol, Diesel, LPG, Kerosene etc. so as to make them affordable for the masses. In doing so, the Government has to carry the burden of huge expense every year which widens the Fiscal Deficit (which is Govt.’s Expense over Income). Widening of Fiscal Deficit of the Government has a threat of reduction in Sovereign Credit Rating by the Rating Agencies like Moody’s, S&P etc. In order to reduce the subsidy expense and increasing Fiscal Deficit of the Government, OMCs sometimes hike the price of Petroleum Products, which causes Inflation.
Recently, Government of India has deregularised Petrol fully and Diesel partially. Therefore, the prices of petroleum products will now depend on the price of International Crude Oil to a large extent.
Another very important factor that affects inflation is Monsoon. Since India is an agrarian economy, production of food crops depends largely on the monsoon. If the monsoon is deficient, the crop production is affected which in turn affects the supply of the food crops. According to the law of supply and demand, reduced supply results in increase in the prices of food crops. Hence, the monsoon forecast by our MET department from time to time is very important for Stock Market.
There are many other factors which also affect the rate of inflation like cement price hike by cement companies, steel price hike by steel companies etc.
Historical rate of Inflation
The inflation rate in India was recorded at 5.96 percent in March 2013. Inflation Rate in India is reported by the Ministry of Commerce and Industry. From 1969 until 2013, India Inflation Rate averaged 7.74 percent reaching an all time high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods.
In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent). Food Articles from the Primary Articles Group account for 14.3 percent of the total weight. The most important components of the Manufactured Products group are Chemicals and Chemical products (12 percent of the total weight); Basic Metals, Alloys and Metal Products (10.8 percent); Machinery and Machine Tools (8.9 percent); Textiles (7.3 percent) and Transport, Equipment and Parts (5.2 percent).
Schedule for release of Inflation data
WPI Inflation data is released every month, generally on 14th of next month at around 11 AM. For example, Inflation for the month of April will be released on 14th of May, if the same is not a holiday.
Impact of released Inflation Data
Generally, a lower inflation data lifts the sentiment of market, especially rate sensitive segment like Automobile, Realty and Banks and vice versa in case of higher inflation data.
INDEX OF INDUSTRIAL PRODUCTION (IIP)
Comparison of economic performance over time is a key factor in economic analysis and a fundamental requirement for policy-making. Short-term indicators play an important role in this context by providing such comparison indicators. Among these short-term indicators, the Index of Industrial Production (IIP) has historically been one of the most well known and well-used indicators. The IIP measures volume changes in the production of an economy, and therefore provides a measurement that is free from the influence of price changes, making it an indicator of choice for many applications. The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period.
In case of India, the base year now is 2004-2005.
IIP Composition
The new series of All India Index of Industrial Production (IIP) with base year of 2004-05 has a broader coverage of 682 items (clubbed in 399 item groups: Mining-1, Manufacturing – 397, Electricity – 1) comprising 61 from Mining & Quarrying, 620 from Manufacturing and 1 from Electricity Sector having the weightage of 14.16%, 75.53% and 10.32% respectively in the all-India IIP.
Schedule for Data Publication
IIP is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month. Normally, 12th of every month is the date of IIP Data.
For example, IIP for the month of March will be released on 12th of May of that year.
Latest and Historical Data
Industrial Production in India increased 0.60 percent in February 2013 over the same month in the previous year. Historically, from 1994 until 2013, India Industrial Production averaged 7.11 percent reaching an all time high of 20 percent in November 2006 and a record low of -7.20 percent in February 2009.
General effect on the market
Usually, movement of Stock Market is directly proportional to the IIP Data, i.e., a positive IIP data is good for the market. However, sometimes, we see that market welcomes a moderate (not-so-good) IIP Data – because a moderate data will raise the hope of RBI rate cut. In recent times, IIP has been falling consistently and the major factor responsible for the poor IIP data is high interest rates. So, according to market’s own dynamics, market sometime welcome a comparatively poor IIP data for the hope of rate cut by RBI.
CURRENT ACCOUNT DEFICIT (CAD)
In economics, current account is one of the two primary components of the balance of payments, the other being capital account. Current Account is the sum of balance of trade (i.e., net revenue from exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.
Current Account balance is one of two major measures of the nature of a country”s foreign trade (the other being the net capital outflow). A Current Account surplus increases a country”s net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called Current Account because goods and services are generally consumed in the current period.
Balance of trade is the difference between a nation”s exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored. A nation is said to have a trade deficit if its imports are more than its exports.
In India, balance of trade is negative, i.e, there is trade deficit because of huge imports of mainly crude oil and gold and the import is much higher than the exports. If the international price of Crude Oil or/and Gold declines significantly, trade deficit as well as current account deficit of our country will improve.
Schedule of Data
Balance of Current Account in India is reported by the Reserve Bank of India. Basically, Current Account Data is more popular in the form of Current Account Deficit as a percent of GDP. This CAD to GDP data is reported by Finance Ministry, Government of India.
For Example, India reported a Current Account Deficit of USD 32.63 billion in Q3 FY13 but what is easily remembered by the market is that CAD was 5.10 percent of GDP in Q3 FY13.
The CAD Data is published for every quarter and within 90 days from the end of the corresponding quarter.
General effect on the markets
Current Account Deficit is presently at a very high level in India, mainly due to high degree of imports of Crude and Gold. Recent declines in Crude and Gold Prices in the international market has raised the hope of significant improvement in Current Account Deficit in coming quarters. Improvement in CAD is always a positive sentiment for the markets.
