Stock Market and Economy

The London Stock market has a market capitalization of US$6.06 trillion (2014). Stock market movement influence economic situations and everyday life of people directly or indirectly.As today we are living in a global village collapse in share prices of one market causes ripple effect on other markets and widespread economic disruption. The great depression in 1930's can be taken as the most famous example of the after effects as the the stock market crashes in 1929. More recently global financial meltdown happened in 2007 witness the crashing of stock market all over the globe marking as the beginning of economic recession. Yet, daily movements in the stock market can also have less impact on the economy.

 Economic Effects of the Stock Market:

1.Wealth Effect: Fall in share prices leads to fall in wealth with ripple effect on consumer spending habit  .However long term outlook hardly changes with the short term lose  often people are already prepared for the short term looses in the share market.

2.Effect on Pensions:Pension funds invest a significant part of their funds in the stock market. Any turmoil in the prices of the stock will results in value reduction of the pension funds.

3.Confidence: Often share price movements are reflections of what is happening in the economy. E.g. a fear of a recession and global slowdown could cause share prices to fall. The stock market itself can affect consumer confidence. 

4. Investment: Falling share prices can hamper firms ability to raise finance .Companies  issue new shares to raise funds as its is cheaper  source of capital than the raising  debt. However with falling share prices It would be a difficult task for the company. 

5. Bond Market: A fall in the stock market makes other investments more attractive. People tend to move into gold or government bonds as they considered as safer investment alternatives.

   India is back on investors’ radar

 India is back on investors’ radar can be concluded by the OECD publication at least. The OECD (Organisation for Economic Co-operation and Development) publishes composite leading indicators, or CLIs. CLIs intend to “provide early signals of turning points in business cycles”.India’s indicator has been rising consistently from its trough of 98.1 in November 2013. This indicates an uptrend in India’s business cycle.

Why Macroeconomic Indicators are Important:

Although stock markets can help you understands  investors’ mood however  they’re prone to irrational behavior.Macroeconomic indicators assess the economy’s health—even though most of them are released with a lag. 

Following is  the list  Indicators which should be studied to gauge the Index Performance:

1    Gross Domestic Product( GDP):GDP expanded by  7.3% in 2014-2015.Capital formation is continued to be on lower edge at 28.7% of GDP against 29.7 in 2013-2014.Manufacturing sector grew by 7.1% in current year as compare to 5.3 % in 2013-2014. Almost all the sector grew this year except Agriculture.Agriculture. However numbers are encouraging enough to put the investors faith in the market.

  2.Fiscal Deficit:India is a developing country. As a result, fiscal deficit is expected. The government is expected to spend in order to provide infrastructure.In FY 2013-2014 Fiscal deficit was 4.5% of GDP , it was 5.08 trillion rupees .The government aims to lower it to 4.1% of GDP in the current year.

 3.Trade deficit: Since its independence in 1947, India maintained a trade deficit with the world. It maintained a trade deficit almost continuously. In fact, in fiscal year 2013, India recorded its highest trade deficit ever. It was$190 billion. However Current statistics shows improvement in the trade deficit mostly on lower international commodity prices.

 4.Inflation:India has two measures of inflation:

WPI (wholesale price index)

CPI (consumer price index)

  5.India's Industrial Production:(IIP): Industrial production is measured by the Index of Industrial Production, or IIP. The index tracks 682 items under three sectors:Manufacturing has the highest  contribution at  75.5%. It’s followed by mining at 14.2%. The IIP is a monthly indicator. It’s released with a one month lag—for example, the release in July will be for May.The government is taking every required step to spur the industrial growth with major focus on manufacturing

mining

manufacturing

electricity

 Look Outs For 2015:

 India is part of the BRICS(Brazil, Russia, India, China and South Africa) nations. This is a group of major and high-potential emerging countries. The countries are distinguished by their large economic size, population size, and political influence. As a result, tracking their economic growth is important.It’s important that investors watch all of the indicators this year. India needs to be brought back to a steady growth path. Some of the indicators are related.So, an improvement in one indicator could be positive for another indicator.The FIIs need to be facilitated in the country that would support stock market.Therefore, foreign investors need to sustain in the Indian market as their movement effects the stock prices.  There exists requirement for the initiative to be taken by government to reduce interest of investors in yellow metal and enhance the investment in share market through improving the confidence level investors in the stock market.

Summary:

Current year is very crucial  for India’s economy. With a strong public mandate, expectations from the government are very high. Structural reforms and developments can make this a turnaround year for India.There are low fuel prices in the medium term. This can keep inflation in check. .Supportive monetary policy by RBI can help India achieve the desired growth goals.However, weak decision making on reforms, or a re-ignition of the inflation flame, will deter India’s central bank from loosening monetary policy. This would be negative for India's economic growth.Thus from the above discussion it  can  be conclude that economy conditions of the country will foretell  most of the time the expected boom or doom of the market. In particular reference to India further Positive data and sustained  efforts  from the government  can set the path for the  continuous ride in the Index.