Learn With ETMarkets: Role of economic indicators in stock market analysis
Which major indicators affect the stock market?
Monetary Policy
Monetary policy, managed by a country's Central Bank, balances economic growth and inflation by adjusting interest rates. In India, the Reserve Bank adjusts the Repo Rate to control the money supply. Lower rates spur economic activity, while higher rates curb inflation.
Case in point: During the COVID-19 pandemic, India slashed rates to stimulate economic recovery, fueling stock market rebounds.
Fiscal Policy
Governments use taxation and spending to support growth. Tax cuts increase disposable income, driving consumer spending and economic growth. Strategic spending boosts sectors like defence and railways, benefiting associated companies.
Case in point: In September 2019, when the government slashed corporate taxes, the stock markets welcomed the move, with the Nifty 50 Index rising by 5% in a single day.
Additionally, increased government spending in sectors like defence, railways, and renewable energy has bolstered the future prospects of companies in these sectors, resulting in impressive returns for their shareholders.
Inflation Levels and Unemployment
High inflation and unemployment levels curb consumer spending, impacting demand trends. Inflationary pressures restrain consumption, while high unemployment increases dependency ratios.
Case in point: Throughout most of 2022 and 2023, inflation levels in India hovered near the RBI's upper tolerance range of 2-6%. Consequently, rural India, comprising over 35% of the country's total
