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
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.
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
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.
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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.”