Perhaps among all areas of activity, the Indian Stock Market is one area where the economic indicators do a lot in building up market sentiments and relating to investment decisions. These very indicators, when they talk in terms of economic boom or a recession, be it forth or back, give essential indications to investors about the ‘all-around health’ of an economy. These economic indicators are vital for any investor or stock trader who is interested in investing or trading in India-related stocks.
Today, in this blog, we are going to break down the most relevant and important economic indicators that impact the Indian stock market. We will explain what each one of them represents and guide you through how an investor would interpret the same to make better decisions.
What Are Economic Indicators?
Economic indicators are statistical points to show the insight about the performance of the country’s economy. There are overall three types of these indicators that cover almost all the aspects.
1. Leading Indicators: These are kinds of indicators that foretell future economic activity and warn concerning such trends before they enter into an economy.
2. Lagging Indicators: They confirm the trends that have been initiated; mostly, these are used in evaluating the performance of an economy.
3. Coincident Indicators: These move with the economy and reflect the current state of the economic activity.
Investors, therefore, use macro and financial market indicators to see how well the economy is and forecast on how the market would react going forward.
Major Economic Indicators of Indian Stock Market
1. Gross Domestic Product (GDP)
The GDP is one of the most followed economic indicators because it reflects the total value of goods and services produced in the country within a given time frame. Generally, the expanding economy translates to rising GDP, which is good for the stock market. Conversely, shrinking GDP presages an economy that is contracting, hence typically also often leading corporate earnings as well as the performance in the stock market down.
The investors generally pay much importance to the quarterly numbers of GDP in India. To illustrate, if growth exceeds expectations for the Indian economy then the market sentiments may improve to become bullish. But if growth slows down considerably then there are good chances that it may turn the market bearish at which the investor will place more bets on the defensive stocks or even consider quitting the market.
2. Inflation Rate: CPI and WPI
Indeed, inflation is one of the key indicators of the economy as it affects at core levels the buying capacity of consumers and also impacts business’ cost of doing business. While India calculates CPI, it calculates inflation both on the prices of goods and services bought by the average consumer; the WPI is the measure of changes in prices at the wholesale level.
High inflation may often indicate an overheated economy, and RBI would response with high interest rates that check the inflationary forces. High inflation normally increases erosion of the purchasing power of earnings, lowers profitability of corporations, and hurts the stock prices for the investors. Low inflation is commonly friendly to the economy as it tends to reflect price stability.
3. Interest Rates and RBI Monetary Policy
One of the instrumental bodies that run the economy of the country toward health is the RBI. Reform used by RBI in monetary policy decisions involves the interest benchmark, which is most times in two standard rates. Some of the most common terms used with respect to it are the repo rate and the reverse repo rate.
When the RBI increases interest rates, the borrowing cost goes up, prompting slow spending by consumers and investments in business ventures. This can lead to many detrimental side effects on the stock prices of an organization particularly in those sectors that are interest rate sensitive including banking and real estate, automobile industries, etc. On the contrary, when the RBI reduces interest rates, it encourages borrowing and spending which further accelerates economic growth and its positive spill-over effects on corporate profits.
4. Foreign Institutional Investments (FII) and Foreign Direct Investment (FDI)
Foreign investment inflows are the prime mover of the Indian stock market. Foreign Institutional Investors (FII) and Foreign Direct Investment (FDI) indicates the investment of foreign investors in Indian equities and companies. Therefore, more inflows of FII and FDI lead to a sense of confidence about the Indian economy and creates a positive mood about Indian stocks and others.
However, in case of a general capital exit by foreign investors, the stock market may face some downward pressures. Therefore, trends in foreign investments should also be watched by the investors as such trends are pretty easy to change the market performance .
5. CAD and Trade Balance
CAD is, actually India’s trade balance, or rather, the country’s current account deficit. This takes place each time a country imports more goods and services than it exports. The more this nation lets its currency value, the Indian Rupee to weaken, while incurring more debt in the country that means just one thing for an investor as regards the stock markets of the nation.
A positive balance of CAD generates increased confidence in the market and leads to an appreciation of the rupee. On the other hand, concerns in terms of a growing CAD about the country’s ability to service the external obligation lead to long-run effects for stock markets.
6. IIP (Index of Industrial Production)
The index of industrial production, or IIP, is essentially an index that measures the overall output of the industrial sector, including manufacturing, mining, and electricity generation in India. This index acts as a leading indicator as it provides early signals about economic activity and industrial growth. In general, growth in industrial production is typically associated with a healthy economy and conditions the corporate earnings sector along with the stock market.
However, deceleration or decrease in IIP growth indicates economic weakness, reducing investor confidence and subsequently stock prices.
7. Currency Exchange Rates
India uses the Indian Rupee (INR) as its currency, and it is directly tied to the stock market. In this scenario, trade and capital flow affect the value of the rupee and foreign exchange reserves. The rapid depreciation of rupee enhances the costs of importing goods that exerts inflation pressures, thereby reducing the profitability of the companies utilizing imported goods and services as inputs. A high rupee reduces inflation and attracts investors, which includes foreign investors.
8. Unemployment Rate
It is an excellent statistical indicator representing the status of the labour market, therefore of the economy. When at a high unemployment rate, then it points to an economy that is weak with a depressed sale of goods and services; this might be interpreted in terms of slower growth in corporate earnings. A falling unemployment rate normally signals a vibrant economy having consumers with increasing demand thus promising better outlooks in the stocks.
Conclusion
The economic indicators are a tool through which the macroeconomic environment of operation for the Indian stock market is understood. Keeping an eye on major points like GDP growth, inflation, interest rates, foreign investment, and industrial production will help an investor to make the best possible decisions about how to position the portfolios for the fluctuations in the market.
However, it is pertinent to note that no single economic indicator can be taken in isolation as interplay between different indicators gives a comprehensive understanding of the direction the market is likely to take. Such an understanding of these indicators as well as the same regarding influence on market sentiments may help in a better investment choice and reducing the risk for the Indian stock market investor.