You should have noticed that the share price of companies rises if their results are favourable. Or if there is positive news about them. But if you believed that only these events affected the stock markets, then you are mistaken. Besides these micro-events, there are also macro events that have a significant impact on the share market.
So, what exactly is an Economic Calendar? Basically, it’s a list of significant macro events and indicators that influence the economy. And why are these relevant in stock markets, you ask? The answer is that, ultimately, the stock market runs with money and emotions, both of which are influenced by macro events and indicators. That is precisely why the economic calendar is a deciding factor in the stock markets.
Importance of an Economic Calendar
Read on, and you'll understand what these events are.
It means the government's budget, i.e., expected revenues and expenditures for the next financial year. It is presented every year on the 1st of February. In the case of Union Elections, an interim budget is presented in February. The final budget is presented post-elections. During the budget speech, the big players try to analyse the impact of the budget on various companies. It leads to significant movement in the stock market.
The tax rates on Short-Term and Long-Term Capital Gains also play a vital role in investment. If increased, investors sell their shares to avoid taxes in the future, leading to a downfall in the market. The income tax and indirect tax also affect the aggregate demand due to changes in the disposable income of people.
Moreover, the budget gives information about the expenditure allocated to different sectors. If the allocated outlay is increased, it is a positive indicator. The sectoral indices rise, assuming the benefit to big companies.
In the recent budget, the health sector's expenditure rose by a whopping 137%, which led to a massive rise in the share prices of pharma companies. The announcement of divestment of PSUs has created a bull run among them. You wouldn't believe that the Nifty Bank rose by 9% on that day!!
You may be familiar with words like Repo Rate and Reverse Repo Rate. These are the components of the Monetary Policy of RBI. RBI takes various measures to regulate the money supply, which is essential to maintain the balance between economic growth and price stability.
RBI conducts its Monetary Policy Committee (MPC) meets every two months, which decides the interest rates and their impact on stock markets. Generally, they try to stabilise interest rates to avoid excess inflation. But they are reduced to increase liquidity in case of recession and vice versa. That's a dilemma, which our central bank tries to maintain anyway.
Based on these rates, the commercial banks decide their interest rates of public deposits and loans. These rates affect the stock market significantly. If the rates are high, people will prefer to keep their money in the bank, as they will get better returns at low risk. And the borrowers will be discouraged to borrow. This leads to less liquidity in the markets, which in turn results in a fall in the prices of stocks.
On the other hand, when interest rates are low, people either borrow more or avoid depositing money in bank accounts. As a result, there is more liquidity in the markets, which makes more people pour money into the stock markets.
If you thought that only economic events affect the share market, you were wrong. Major political events like union and state elections also have a substantial impact. It determines which parties will come in power and the policies to be implemented.
In India, union elections are held every five years, which gives people a wonderful opportunity to mint money. State elections supplement the union elections in predicting the next union government and the ease in forming the policies. That is why you would have noticed that there is extreme volatility during the election days.
When exit polls declared the victory of NDA in Union Elections 2019, both Sensex and Nifty rose by 3.7%. It was so because the BJP-led NDA government was a stable one with policies favouring capitalism, which is evident even now.
The international elections also affect the Indian stock market because of the policies of the winning president towards India. When Joe Biden won the US Elections, Sensex rallied 4% in 4 days, with a boom in the IT Sector.
Gross Domestic Product (GDP)
Remember, GDP growth became negative during the Covid-19 pandemic. But did you know how it impacts the stock market? No? But wait, let's understand GDP first.
GDP is the aggregate value of goods and services produced in an economy during a specific period. Growth in GDP indicates economic growth and an increase in aggregate demand. It can be interpreted with the better performance of the companies, leading to a rise in stock prices.
Inflation is the increase in the prices of goods and services in the economy over time. To understand easily, ask your parents about the school fees that they paid during their childhood. You would be surprised to know that it was as low as Rs 20, which can't even buy you a notecopy now!
Anyway, there are two indices of measuring inflation: Consumer Price Index (CPI) and Wholesale Price Index (WPI). CPI measures the change in retail prices,i.e., the price paid by us to buy goods and services. WPI measures the changes in wholesale prices. Due to high inflation, the purchasing power of consumers falls, which leads to a reduction in aggregate demand. It hurts the sentiments of investors and the share market.
But inflation is commonly known as an inevitable evil. It can't be eliminated. Moreover, stable and low inflation is necessary for economic growth.
An increase in industrial production leads to economic growth and reduced unemployment. It is measured by the Index for Industrial Production (IIP). Industrial production directly affects the revenue and profits of companies. More production means more revenues and, consequently, more profits. It also helps in reducing the prices of commodities which increases aggregate demand. It is a positive indicator for the stock market.
So, now you know… besides the individual events, there are macro events that can impact the companies or the entire sector. A budget is an important event. People analyse the impact of tax rates and sectoral allocation of funds on the companies, which move the market significantly.
RBI's Monetary Policy impacts the bond market also, besides affecting the share market due to change in interest rates. A political event (like an election) helps in analysing the attitude of the winning party towards corporates. GDP is the indicator of economic performance, which has a direct relation with stock prices. Industrial production also helps an investor to get an understanding of the current industrial performance.
What we meant is that you should not forget to consider all these events while investing in the stock market to make informed and sound decisions. This will help you enhance your returns and shield you against downturns in the market.