- Date : 30/09/2021
- Read: 5 mins
Several factors affect the Indian stock markets. Favourable factors lead to share prices going up, and adverse factors lead to share prices going down.
Before we discuss the factors that affect Indian share market, let us take a quick look at how share markets work. Stock markets act as intermediaries between companies that want to raise money and investors who want to earn a return on their money.
Stock markets comprise two types:
- Primary market: When a company raises money from the public for the first time, it is through an initial public offering (IPO)
- Secondary market: Once the shares get listed, the buying and selling between investors happen through the stock market.
Resources for investors
If you are a new investor, you should educate yourself on the factors that affect share prices. You can gain knowledge about these from:
- Business newspapers – The Economic Times, Business Standard, Livemint, etc.
- Business magazines – Dalal Street, Capital Market, Business India, etc.
- Business news channels – CNBC TV18, ET Now, Zee Business, etc.
- Personal finance websites – TomorrowMakers, Moneycontrol, Value Research, etc.
Now that you know how to keep yourself updated on share market-related news, let us discuss some of the factors that affect share markets. Some of these are:
1. RBI’s monetary policy and interest rates
While stating the monetary policy, the RBI announces its decision on interest rates. A reduction in interest rates is good for the stock market, but an increase is not good. Stocks usually rally when interest rates are reduced and fall when interest rates are increased. The stock markets also react to liquidity. If the RBI increases the liquidity in the financial system, markets react positively. If the RBI reduces the liquidity, markets react adversely.
2. Union Budget
The Union Budget has a big impact on the share markets. During the budget announcements, investors watch out for things like whether the Government’s fiscal deficit is under control, how much money it will borrow in the next fiscal year, etc. Investors also consider if a sector has been given any incentives or whether existing incentives have been withdrawn for any sector. If plans are announced to start new infrastructure projects in highways, railways, airports, power, healthcare, etc., the shares of listed companies that are expected to benefit will go up.
The Government announces the inflation numbers on a monthly basis. Higher inflation leads to the RBI increasing interest rates, which is not good for the stock markets. Lower inflation leads to the RBI either cutting interest rates or maintaining the status quo, which is good for the stock markets.
4. Financial results of companies
Companies’ financial results are the single biggest factor that affects the share prices of individual companies, sectors, and the market overall. If the financial results are better than expected, stock prices will rally. If they are not as expected, or if there are any negative surprises, stock prices react adversely.
5. Government policy
From time to time, the Government announces policies for certain sectors that benefit the listed companies in that sector. For example, an exports scheme benefits companies that export goods and services. To increase manufacturing in India, the Government has announced a Production Linked Incentive (PLI) scheme for many sectors in the last couple of years. The share markets usually react positively to such policy announcements.
6. Investment through FDI and FPI policy
Many companies look to raise funds from foreign investors either through the Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI) route. Any increase in FDI or FPI policy is positive for the stock markets.
7. Exchange rate
The exchange value of the Indian rupee (INR) against the US dollar (USD) influences the investment decisions of foreign investors. A depreciating rupee erodes the returns of foreign investors. If the rupee depreciates steadily over time and the share markets give good returns, foreign investors will be okay with that. But if the rupee depreciates a lot in a very short time, it can spook foreign investors, causing them to sell their Indian investments and exit the Indian markets, which aggravates the exchange rate further.
8. Political stability
Stock markets prefer a government with a clear majority that can undertake bold reforms for economic development. Stock markets tend to do well during such times. If there is a coalition government at the centre that cannot take decisions easily, it leads to policy paralysis. Foreign investors and share markets react adversely to such situations.
9. Natural disasters and pandemics
Stock markets react adversely to natural disasters such as major earthquakes, tsunami, floods, drought, etc. Needless to say, stock markets had one of the biggest falls recently when the COVID-19 pandemic struck without warning.
10. Commodity prices – input costs
India imports many commodities such as crude oil, natural gas, copper, aluminium, etc. Any sharp increase in the prices of these commodities increases the input costs for companies. It reduces their margins and affects their profitability adversely, thereby impacting their share prices negatively. If crude oil prices go up substantially, it increases inflation, resulting in the RBI increasing interest rates. This too impacts the share market adversely.
We discussed the various factors that affect the Indian stock market. To sail through these, investors should have appropriate asset allocation to equity, debt, and gold. Usually, gold does well when share markets fall, and debt provides stability to the investment portfolio. Asset allocation can help you ride the uncertainty phase of stock markets. Further, within equity, you should diversify your investments among large, mid, and small-cap stocks so that the risk is spread out.