Investor Issues
Three critical economic factors that influence the Indian stock market

Different schools of thoughts have specified different factors that make an impact on the stock market. Among the most important are economic policies in shaping the stock market  

 
What makes stock market go up and down? There is no precise answer to this question. Though fundamental analysis and technical analysis are used to predict market behavior and lots of research and study has been done in this regard, stock market experts have found it extremely difficult to fathom the reasons which cause a change in stock market. Nassim Taleb has gone to the extent of writing in his famous book “Fooled by Randomness” that only lucky idiots make money in the stock market thereby signifying the fact that money made in stock market is based on not what you know but how lucky you are.
 
There are different schools of thoughts which have specified different factors that make an impact on stock market; one common factor which often comes out from all this analysis is the role of macro-economic factors in shaping the stock market. How can we forget the day when Iran threatened to close the Strait of Hormuz? The news sent stock markets across world shaking as oil supply was likely to get cut because of Iran’s move and also there was a sudden increase in geo-political tension in the world. Can stock market investors forget the day when the UPA (United Progressive Alliance) government came back to power in 2009 and market got frozen on the upper circuit? Suddenly everything stated looking hunky-dory for the stock market because an expectation was created that economic reforms will continue and will help stock markets. Similarly when the government announced FDI in retail last year, price of various stocks in retail went up suddenly. There are several such events which prove the fact that macro-economic factors make impact on stock markets.
 
But all these factors look momentary and their impact may not be everlasting. There are some factors which have their long-term impact and shape the growth path of stock market. Post 2008 the stock market in India has not seen the best of the times and these factors are responsible to a great extent for shaky performance of the stock market. There are three critical macro-economic factors which have impacted stock markets in India since 2008 crisis. Let us look at how these factors have impacted stock markets in India.

 

Monetary policy and repo rate hike

 

Changes in the repo rate have haunted banks for quite some time. Thirteen consecutive hikes in the repo rate have impacted the market badly. Every time when the Reserve Bank of India (RBI) hiked the repo rate, market reacted negatively and went down. Only after the pace of increase of repo rate slowed down market, breathed a sigh of relief. In fact, such has been the impact of the series of monetary policy measures that the stock market in India pays more attention to the moves of RBI than its own regulator SEBI. The table below shows the relationship between stock market performance and repo rate hike.

 

Source: www.bseindia.com (All changes in Sensex rounded off)
 
As an investor, one needs to take note of this important factor which makes an impact on stock market movement. It is, in fact, not just the repo rate hike but the entire monetary policy of the central bank which has a bearing on the performance of stock market.

 

International crude oil price and inflation

 

Crude oil prices are tracked in the Indian economy with lots of curiosity. Since India imports around 80% of crude oil from the international market, any significant change in price of petroleum makes an impact on inflation numbers which in turn impacts the stock market. Inflation numbers send the market up and down whenever they are announced. Post 2008, there has been a consistent inflationary pressure on the Indian economy which has created trouble for the stock market in India. RBI data shows that the period 1995 to 2008 was the best for the Indian economy when inflation overall was just 5%. Between March 2008 and January 2012, it went up and overall inflation number touched 7.6% while primary group had the highest inflation of 13%.
 

 

Source: RBI

 

Policy announcements of the government


The market, which was disappointed with the policy paralysis of the UPA-2, got a sudden boost with hike in diesel price and FDI in aviation and retail. The government became the darling of the market suddenly and it went up by close to 1,000 points within a few days. Whether it is GAAR or power sector reforms, the market monitors every move of the government. While the government provides strength to the market through regulations, it provides growth impetus with policy announcements.

 

There is no denying the fact that almost every factor having economic characteristics makes an impact on the market but there is no denying the fact these three factors have been a companion of the stock market for the last five years. The performance of the stock market is positively related to these factors. As these factors become better, market will continue to perform better.
 

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COMMENTS

Nilesh KAMERKAR

4 years ago

Watching the market is like watching a drunk walk a tightrope. You never know what is going to happen next. For an average investor it is only an illusion, to try and profit by anticipating the future course of the stock market. In the roller coaster days of the stock market who knows what is up or down. The SENSEX could be 250 points up today & 300 points down tomorrow. It is the speculator’s game to try and benefit by forecasting the market.

Generally people feel optimistic when market prices are rising & pessimistic when market prices are going down. But as Benjamin Graham said “You ought to always bear in mind that market prices are there for your convenience either to be taken advantage of or to be ignored.”

SEBI revises norms for calculating ETF margins

SEBI decided that Value at Risk margin computation for ETFs that track an index shall be computed as higher of 5% or three times sigma of the ETF, in order to bring efficiency in margining of index ETFs


New Delhi: Market regulator Securities and Exchange Board of India (SEBI) has revised norms for computing the margins applicable for exchange traded funds (ETFs) that track broader stock indices, reports PTI.

 

Index ETFs are generally a basket of securities that track a particular index.

 

To bring in more efficiency on calculating margins of index ETFs, SEBI in a circular said it has changed the method of computation.

 

For computing margins on ETFs, they are treated at par with stocks and margins that are applicable on stocks are applied.

 

"In order to bring efficiency in margining of index ETFs, it has been decided that VaR (Value at Risk) margin computation for ETFs that track an index shall be computed as higher of 5% or three times sigma of the ETF," the circular said.

 

Generally, VaR helps to understand the risks related to an investment portfolio.

 

According to SEBI, the revised margin framework would be only for ETFs that track broad-based market indices and does not include ETFs related to sectoral indices.

 

Further, to facilitate efficient use of margin capital by market participants, the regulator would extend cross margining facility to ETFs based on equity index and its constituent stocks for offsetting certain positions in cash market segment segments.

 

The facility would be for ETFs and constituent stocks, ETFs and constituent stocks futures besides ETFs and relevant Index Futures. In all the three cases, it would be applicable to the extent of offsetting the positions of each other.

 

In the event of a suspension on creation/redemption of the ETF units, the cross-margining benefit would be withdrawn, the circular noted.

 

SEBI has asked all stock exchanges to take necessary steps for implementing the revised framework.

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SEBI notifies mutual fund reforms; changes to be effective from October

The changes, which would come into effect from next month, allows fund houses to charge investment and advisory fees on their schemes and levy brokerage and transaction costs

 
New Delhi: Market regulator Securities and Exchange Board of India (SEBI) on Wednesday notified wide-ranging reforms for mutual fund sector in India, which would provide incentives to fund houses for expanding to small cities but might result in additional costs for investors, reports PTI.
 
The changes, which would come into effect from next month, would require fund houses to make half-yearly financial results within one month of the end of every six-month period, SEBI said in a notification.
 
The decisions were approved by SEBI's board in its last meeting on 16th August with an aim to re-energise the mutual fund industry, by expanding its distribution network among other steps.
 
Notifying the proposals approved by its board, SEBI said on Wednesday that the fund houses might charge investment and advisory fees on their schemes, which would have to be fully disclosed in the offer document.
 
In case of a fund of funds scheme, the total expenses of levied on the scheme would be capped at 2.50% of the daily net assets of the scheme.
 
In addition to the total expenses already levied on schemes, SEBI would allow the fund houses to levy brokerage and transaction costs, which is incurred for the purpose of execution of trade and is included in the cost of investment, with a ceiling of 0.12% in case of cash market and 0.05% in case of derivatives transactions.
 
Besides, mutual funds can charge additional expenses of up to 0.30% of daily net assets, if the new inflows from places other than top-15 cities are 30% of the gross new inflows in the scheme, or are 15% of the average assets under management (year to date) of the scheme, whichever is higher. .
 
SEBI further said that the expenses charged under these clauses would have to be utilised for distribution expenses incurred for bringing inflows from such cities, and the amount incurred as expense on account of inflows from such cities would have to be credited back to the scheme in case the said inflows are redeemed within a period of one year.
 
Among other measures, the fund houses would have to calculate the Net Asset Value (NAV) of the scheme on daily basis and publish the same in at least two daily newspapers with nation-wide circulation.
 
Also, any exit load charged by the fund houses would have to be credited back to the scheme.
 
This measure, along with capping of the total additional expenses at 0.2% in normal case, would encourage long term holding and to reduce churn and align the interests of the fund houses and distributors with that of the investors.
 
These particular steps would not result in any additional cost to the investors, but the provision for additional expenses of up to 0.3% for inflows from smaller cities could make the investments costlier at the investors' end.
 
SEBI's board has approved certain additional proposals for mutual funds, including for regulation of distributions and for allowing cash transactions of up to Rs20,000 without PAN requirement, which are expected to be notified later.
 

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