The RBI has consider the factors and should carefully set a few key rates

Key Events and their Impact on Markets

 

 

Monetary Policy

 

The monetary policy is a tool with which the Reserve Bank of India (RBI) controls the money supply by controlling the interest rates. They do this by tweaking the interest rates. RBI is India’s central bank. World over every country’s central bank is responsible for setting the interest rates.

 

While setting the interest rates the RBI has to strike a balance between growth and inflation. In a nutshell – if the interest rates are high that means the borrowing rates are high. If corporate can’t borrow easily they cannot grow. If corporations don’t grow, the economy slows down.

 

On the other hand when the interest rates are low, borrowing becomes easier. This translates to more money in the hands of the corporations and consumers. With more money there is increased spending which means the sellers tend to increase prices leading to inflation.

 

The RBI has to consider all the factors and should carefully set a few key rates. Any imbalance in these rates can lead to an economic chaos. The key RBI rates that you need to track are as follows:

 

Repo Rate – Whenever banks want to borrow money they can borrow from the RBI. The rate at which RBI lends money to other banks is called the repo rate. If repo rate is high that means the cost of borrowing is high, leading to a slow growth in the economy.

 

Reverse Repo Rate – Reverse Repo rate is the rate at which RBI borrows money from banks. When banks lend money to RBI they are certain that RBI will not default, and hence they are happier to lend their money to RBI as opposed to a corporate.

However when banks choose to lend money to the RBI instead of the corporate entity, the supply of money in the banking system reduces. An increase in reverse repo rate is not great for the economy as it tightens the supply of money.

 

Cash Reserve Ratio (CRR) – Every bank is mandatorily required to maintain funds with RBI. The amount that they maintain is dependent on the CRR. If CRR increases then more money is removed from the system, which is again not good for the economy.

 

The RBI meets every quarter to review the rates. This is a key event that the market watches out for. The first to react to rate decisions would be interest rate sensitive stocks across various sectors such as – banks, automobile, housing finance, real estate, metals etc.

 

 

Inflation

 

Inflation is a sustained increase in the general prices of goods and services. Increasing inflation erodes the purchasing power of money. All things being equal, if the cost of 1 KG of onion has increased from Rs.15 to Rs.20 then this price increase is attributed to inflation. Inflation is inevitable but a high inflation rate is not desirable as it could lead to economic uneasiness. A high level of inflation tends to send a bad signal to markets. Governments work towards cutting down the inflation to a manageable level. Inflation is generally measured using an index.

 

There are two types of inflation indices – Wholesale Price Index (WPI) and Consumer Price Index (CPI).

 

Wholesale Price Index (WPI) – The WPI indicates the movement in prices at the wholesale level. It captures the price increase or decrease when they are sold between organizations as opposed to actual consumers. WPI is an easy and convenient method to calculate inflation. However the inflation measured here is at an institutional level and does not necessarily capture the inflation experienced by the consumer.

 

Consumer Price Index (CPI) - The CPI on the other hand captures the effect of the change in prices at a retail level. As a consumer, CPI inflation is what really matters. The calculation of CPI is quite detailed as it involves classifying consumption into various categories and sub categories across urban and rural regions. Each of these categories is made into an index. This means the final CPI index is a composition of several internal indices.

 

The computation of CPI is quite rigorous and detailed. It is one of the most critical metrics for studying the economy. A national statistical agency called the Ministry of Statistics and Program Implementation (MOSPI) publishes the CPI numbers around the 2nd week of every month.

 

The RBI’s challenge is to strike a balance between inflation and interest rates. Usually a low interest rate tends to increase the inflation and a high interest rate tends to arrest the inflation.

 

 

Index of Industrial Production (IIP)

 

The Index of Industrial Production (IIP) is a short term indicator of how the industrial sector in the country is progressing. The data is released every month (along with inflation data) by Ministry of Statistics and Program Implementation (MOSPI). As the name suggests, the IIP measures the production in the Indian industrial sectors keeping a fixed reference point.

 

Purchasing Managers Index (PMI)

 

The Purchasing managers index (PMI) is an economic indicator which tries to capture the business activity across the manufacturing and service sectors in the country. This is a survey based indicator where the respondents – usually the purchasing managers indicate their change in business perception with respect to the previous month. A separate survey is conducted for the service and the manufacturing sectors. The data from the survey is consolidated on to a single index.

 

Budget

 

The Budget is an event during which the Ministry of Finance discusses the country’s finance in detail. The Finance Minister on behalf of the ministry makes a budget presentation to the entire country. During the budget, major policy announcements and economic reforms are announced which has an impact on various industries across the markets. Therefore the budget plays a very important role in the economy.

Budget is an annual event and it is announced during the last week of February. However under certain special circumstances such as a new government formation the budget announcement could be delayed.

 

 

Corporate Earnings Announcement

 

This is perhaps one of the important events to which the stocks react. The listed companies (trading on stock exchange) are required to declare their earning numbers once in every quarter, also called the quarterly earning numbers. During an earnings announcement the corporate gives out details on various operational activities including…

 

1. How much revenue the company has generated?

2. How has the company managed its expense?

3. How much money the company paid in terms of taxes and interest charges?

4. What is the profitability during the quarter?

Besides some companies give an overview of what they expect from the upcoming quarters. This forecast is called the ‘corporate guidance’.

 

 

The Key Takeaways:

 

1. Markets and individual stocks react to events. Market participants should equip themselves to understand and decipher these events
2. Monetary policy is one of the most important economic events. During the monetary policy, review actions on repo, reverse repo, CRR etc are initiated
3. Interest rates and inflation are related. Increasing interest rates curbs inflation and vice versa
4. Inflation data is released every month by MOSPI. As a consumer, CPI inflation data is what you need to track
5. IIP measures the industrial production activity. Increase in IIP cheers the markets and lower IIP disappoints the market
6. PMI is a survey based business sentiment indicator. The PMI number oscillates around the 50mark. Above 50 is good news to markets and PMI below 50 is not.
7. The Budget is an important market event where policy announcements and reform initiatives are taken. Markets and stocks react strongly to budget announcements
8. Corporate earnings are reported every quarter. Stocks react mainly due to the variance in actual number versus the street’s expectation.