How Any Policy Decisions or Changes in a Nation Affect the Stock Market ?

Policy Changes

Stock market is a very deep ocean with no limits. It is not only a trend based market but it also reacts to the slightest news. All this is the simple result of the demand and supply equilibrium.

In India Stock market is a very old term and there are a lot of people who have become rich or have lost everything overnight. Markets in India move on lots of fundamentals and sentimental data. It reacts to the support and resistance level as well as the policy changes or political instability or flash news.

The very simple and recent example of it is the bloodbath on March 23,2020. On 22nd March P.M. of India, Narendra Modi declared a nationwide lockdown because of which all the stocks fell almost 20-25% in value and there was massive value degradation in the Indian markets. The Nifty that was trailing near to 13000 levels came down to 7500 and all this happened within a month. Major degradation happened in 2 – 3 days. Hence the market always reacts to news and policy changes because in India the market is more driven by sentiments than fundamentals.

Liberalization and 2021

At the time of Liberalization in 1992 the Nifty 50 was trailing at 750 levels. The reason was India’s closed economy and the Harshad Mehta scam. India’s closed economy restricted foreign companies from entering the nation’s boundaries and the excise duties were killing the wish of Indian businessmen to acquire goods from other countries.

Due to liberalization there were lots of bans and blockages lifted up. Indian economy was made open for the MNC’s. This boosted the supply and quality of goods available to consumers. Though the local businesses were affected initially due to lower costs of foreign goods and competition but in the long run the quality of Indigenous products also increased. This gave a boost to foreign companies establishing Indian subsidiaries and getting them listed in the market. At that time there were not many companies available and those available had a short tenure and it was totally based on promoters moves. No fundamentals or sentimental move gave the stocks higher prices or movements. Back then SEBI also had restricted power.

But it was the lifting up of restrictions and the Harshad Mehta scam that changed the phase of Indian economy. Companies came into India and SEBI was given more powers. More and more got listed and the market came to a stable position in the long run. Due to all such reasons and constant investment by Indian and Foreign investors today the Nifty has reached the level of 14000.

Policies and Changes That Affect the Market

  • Monetary policy
  • Budget policy
  • Political party and changes in the ruling party (political stability)
  • Net exports and trade deficit
  • Changes in other nation’s policy or power

Monetary Policy

RBI gives the monetary policy every year. In India the monetary policy is updated every quarter. This means there are 4 monetary policies updates presented every year. Monetary policy is based on the current situation of the nation. It involves all the factors possible be it the trade deficit or income generation industries. It designs various rates in accordance with them. The rates displayed are Repo rate, Reverse Repo rate, Cash reserve ratio, Bank rate and Marginal standing facility rate.

The most famous rates are Repo rate and Reverse repo rate. Repo rate is the rate at which a bank borrows money from RBI and reserve repo rate at which RBI borrows money from the bank. This decides the entire loan system in the nation. If the Repo rate decreases that means banks will borrow more money from RBI and will cut down the interest rates. This gives an opportunity to business houses to borrow money from banks and hence increase the income of banks. This in turn increases Consumer spending and the effect is seen in the Indian stock market as the goods of companies will be sold more. This increases their sales and their profits and hence their value increases increasing the Stock market valuation.

Budget Policy

Budget policy is the indication of Government spending. It is the use of tax collection in various sectors for the development of the nation. This is the trump card and decides the fate of various sectors.

For example :- Let’s assume the government is earning an income of 100 Rs. Out of that it spends only 10 Rs. in the pharma sector. But the government decides to improve the pharma infrastructure and wants to invite new companies for indoor production. For this reason the government increases its spending to 20 Rs. This will change the entire face of the pharma industry and the stocks related to it .

Now the government will provide better infrastructure to pharma companies for production facilities. Pharma companies will get incentives for starting their production plants. The government will liberalise its tax policies for the pharma segment. This will give the companies an opportunity to increase production and sell the medicines at more profit margin. This will also improve the demand as the price of the medicines will decrease because the medicines that were previously made abroad are now made in India and this will reduce their prices. Hence all of this will increase the sales and the profit and opportunities for the pharma companies. This will increase the prices of pharma companies and the market valuation will increase eventually.

Hence budget policy changes the entire face of a sector in the economy. Whenever the budget is about to be declared the pre budget rally occurs. It is a phenomenon which gives changes to stock prices based on assumptions of investors and traders.

Election and Politics

Election is the time when the stock market makes the biggest movements. The India stock market reacts massively during the time of elections as the change in ruling party or the stability of that party decides various things. If the ruling party wins again and stays in power the market will receive positive sentiments most of the time as the business policies will remain the same and there would be no changes in the on going government ruling and decisions.

But there are instances when such changes result in a very positive outlook for the market. It happens due to the promises made by the party during their campaign. When the election campaign begins every party focuses on certain issues and their ways to solve it. If the ruling party wins the sectors in favour of their promises would gain and if the opposite party wins the sectors in the favour of their promises would increase in valuations.

When the ruling party gets dethroned and a new party comes in power the market suffers from heavy losses due to instability. It gives a message that many policies, the ruling pattern, the decisions made previously etc. are gonna change heavily and that the economy of the nation would be unstable for a long period of time.

In India political instability is a major reason for slow growth. Due to instability many MNCs avoid having production facilities in that nation.

Net Exports and Trade Deficit

Net exports = Net exports – net imports. This means the net value of exports the nation has at the end of a given time period. More the Net exports more benefit. The simple reason is profitability for the nation and inflow of more foreign currency. In a situation of more exports than imports the nation’s economy gains handsomely and more companies get interested in investing in that country.

The situation where the net imports are more than net exports is called trade deficit. Trade deficit is very common for developing and underdeveloped nations. But gradually a nation shifts its nature from being trade deficit to having more net exports.

If the nation is a net exporter then the market rises due to more demand in Indigenous goods and hence increasing the company’s valuation. However a trade deficit signals weak quality of goods or lack of goods for export.

Changes in Other Nation’s Policy or Power

The change in policy of other nations also affects the Indian markets. For example :- India exports textiles to Nepal. If tomorrow Nepal declares that there is an increase in tax applied on imports of textiles, the demand for Indian textiles would decrease and it will create losses for Indian companies.

Similarly the power change in foreign countries also affects the Indian market. For instance let’s understand one of the recent changes i.e. President of U.S. Biden became the new president of the U.S. Biden said that he will make sure that more people would be getting better healthcare facilities. When Biden was elected the pharma stock in India like Dr. Reddy grew. The reason behind it was Reddy is an Indian company but it has a major part of its business in the U.S. as well. Hence the change will increase its demand for medicines which will benefit the company. Due to such a promise by Biden, Dr. Reddy’s price increased.

In India there are many other factors also which decide the stock movements. The decision like making NBFCs banks or Changes in Mutual fund policy or Changes in Government strategy of spending or the holding percentage change by Government / private companies in listed companies or change in the GST rules.

Hence the markets always react whenever a major change happens in the nation or across the globe.

 

 

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