Macro-Economic Indicators for Stock

Submitted By: Abhinav gupta

Contents

1) Acknowledgement 2) Introduction: Macro-economic Indicators 3) Indicators A) Inflation a) CPI b) WPI B) Interest Rates a) Repo Rate b) Reverse Repo Rate c) Cash Reserve Ratio d) Statutory Liquidity Ratio e) Marginal Standing Facility C) Purchasing Managers’ Index a) Service Sector b) Manufacturing Sector D) Index for Industrial Production E) Foreign Institutional Investor F) Foreign Direct Investment G) Currency H) Credit and Deposit Growth I) Consumer Outlook Index J) Gross Fixed Capital Formation K) Balance of Payment 4) Impact of Indicators on Stock Prices

Acknowledgement

On the completion of my project on Macro-economic Indicators for Stock, I would like to convey thanks to Mr.

Amit gupta, my mentor who gave his valuable guidance for completion of my project. He helped me to

understand the details of the project.

Macro-economic Indicators

Macro-economic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the

economy (industry, labor market, trade etc.). They are published regularly at a certain time by the governmental agencies and the private sector.

Different indicators are GDP, unemployment rate, inflation (CPI & WPI), interest rates, money supply, credit and deposit growth, business cycles,

foreign exchange, purchasing managers’ indexes (PMI), private and public consumption, gross fixed capital formation (GFCF), foreign domestic

investment (FDI) and foreign institutional investor (FII), consumer outlook index(COI), currency, etc. Most of the indicators are interlinked.

Indicators

1) Inflation The rate at which the general level of prices for goods and

services is rising, and, subsequently, the purchasing power

is falling

a) CPI

The Consumer Price Index is a measure of changes, over

time, in retail prices of a constant basket of goods and

services representative of consumption expenditure by

resident households.

b) WPI

The Wholesale Price Index is the price of a representative

basket of wholesale goods.

Over the time both WPI and CPI has decreased. This is due

to reviving of Indian economy from slowdown.

2) Bank Rates/ Interest Rate The interest rate at which nation’s central bank lends

money to domestic banks. Often these loans are very short

term duration. Lower bank rates can help expand the

economy, when unemployment is high, by lowering the cost

of funds for borrowers. Conversely, higher bank rates help

to reign in the economy, when inflation is higher than

desired. The bank rates can also refer to the interest rates

that banks charge customers on loan. It is a monetary policy

instrument to control the money supply in the economy.

a) Repo Rate

Repo rate is the rate at which the central bank of a country

(RBI in India) lends money to commercial banks in the event

of any shortfall of funds.

b) Reverse repo rate

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

CPI

CPI

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

WPI

WPI

Reverse repo rate is the rate at which the RBI borrows

money from commercial banks within the country.

c) Cash Reserve Ratio (CRR)

Cash reserve ratio(CRR) is a specified minimum fraction of

the total deposits of customers, which commercial banks

have to hold as reserves with the RBI.

d) Statutory Liquidity Ratio (SLR)

SLR refers to amount that the commercial banks are

required to maintain in the form of gold or government

approved securities (bond and shares of different

companies) before providing credit to the customers. The

RBI in August reduced SLR in the wake of government

narrowing fiscal deficit to 4.1% of GDP for 2014-15 and

keeping the rates unchanged. The move was aimed at

helping banks meet the liquidity coverage ratio norms as

they gear up to meet the stringent higher Basel-III

framework requirement.

e) Marginal Standing Facility (MSF)

MSF is the rate at which scheduled banks could borrow

funds overnight from RBI against government securities.

The MSF is pegged 100bps above the repo rate.

Effect of increase interest rates on businesses

The businesses borrow money from banks to run and expand their

operations. When the banks make borrowing more expensive,

companies might not borrow as much and will pay higher rates of

interest on their loans. Less business spending can slow down the

growth of a company, resulting in decreases in profit. To arrive at

stocks’ price divide the future discounted cash flow by the number

of shares available. This price fluctuates as a result of the different

expectations that people have about the company at different

times. Because of those differences, they are willing to buy or sell

shares at different prices. If a company is seen as cutting back on its

growth spending or making less profit- either through higher debt

expenses or less revenue from consumers- then the estimated

amount of future cash flows will drop. All else being equal, this will

lower the price of the company’s stock. If enough companies

05

10152025

6/1

/20

13

7/1

/20

13

8/1

/20

13

9/1

/20

13

10

/1/2

01

3

11

/1/2

01

3

12

/1/2

01

3

1/1

/20

14

2/1

/20

14

3/1

/20

14

4/1

/20

14

5/1

/20

14

6/1

/20

14

7/1

/20

14

Reverse repo Repo CRR

MSF SLR Bank Rate

experience declines in their stock prices, the whole market, or the

indexes that many people equate with the market, will go down.

Effect of increase in interest rate on consumers

Bank rates are the rates that banks charge their costumers to

borrow money. Individuals are affected through increases in credit

card and mortgage interest rates, especially if they carry a variable

interest rate. This has the effect of decreasing the amount of money

consumers can spend. People still have to pay the bills, and when

those bills become more expensive, households are left with less

disposable income. This means that people will spend less

discretionary money, which will affect business’ top and bottom

lines. The changes in the bank rates affect the behavior of

consumers and the stock market is affected. Because of different

expectations of consumers about company, they are willing to buy

or sell at different prices. Investing in stocks can be viewed as too

risky compared to investment. When Central Bank raises interest

rate, newly offered government securities, such as Treasury Bills

and Bonds are viewed as the safest investments and usually

experience a corresponding increase in interest rates. The risk free

rate of return goes up, making these investments more desirable.

3) Purchasing Managers’ Index (PMI) PMI are economic indicators derived from monthly surveys

of private companies. The index is based on five major

indicators: new orders, inventory levels, supplier deliveries

and the employment environment.

Service sector

During January, 2013 the service sector rose from 55.6 to 57.5

mainly because rising volumes of incoming work and the level of

unfinished work also rose. During February the index declined to

54.2 indicating a continued expansion of this sector. During this

period cost inflation persisted for almost four years. During March

the index declined to 51.4 indicating further expansion of business

and slower growth in the new business led to easing with regards to

output but the rate of expansion was weakest. During April, the

index fell further to 50.7 signaling slower activity growth which

reflected weaker gains and market conditions were also challenging.

Cost inflation also increased. During May the index rose to 53.6 as

expansion was solid and inflation eased. The reading for June fell to

51.7 indicating modest rise in the activities. Output growth

decelerated because of weaker gains and subdued economic

conditions. The rate of charge inflation was moderate. In July the

index fell to 47.9. A difficult climate and falling new business were

the main reason for lower output volumes. In August the index fell

to 47.6 indicating further contraction of service output. A solid

decline was reflected in new business levels and tough economic

conditions. The index was all time low 44.6 in September as output

dropped sharply, marked by drop in new business. The decline was

linked to weaker demand and a difficult economic climate. In

October the index rose to 47.1 indicating fourth successive

contraction of this sector the sharpest decline was noted at Hotels

& Restaurants. In November the index further rose to 47.2 pointing

towards weakest rate of contraction. In December the index fell to

46.7. The latest fall in output was solid due to decrease in incoming

new work. The news of upcoming elections has also contributed to

the latest drop in new orders. In January, 2014 the index rose to

48.3 as the rate of contraction was marginal and weakest. Tough

economic conditions, political issues and lower new order levels are

the main reason behind the fall in output. In February the index

further rose to 48.8, where output declined which was liked to

lower levels of incoming new work and economic instability. The

index fell to 47.5 in March. The index rose to 48.5 in April indicating

a slower contraction of output. A difficult economic climate,

combined with elections and further drop in new orders had all

contributed to the latest fall in business activity and output.The

index rose from 50.2 in May to 54.4 in June was at a 17-month peak.

The end of elections, planned increases in marketing budgets,

forecasts of stronger demand and ongoing improvements in India.

The index fell to 52.2 in July this was mainly because of inflationary

pressure in the economy on a supply-side.

Manufacturing Sector

In January, 2013 the index declined to 53.2 from 54.7. The growth

softened because of power shortage which restricted production

and led companies to utilize warehouse stocks. As a result, new

total business and export orders increased. The index rose to 54.2 in

February, signaling a further improvement in business condition.

The higher levels of new orders and power shortages both fed

through to the latest rise in unfinished business. In March the index

was 52. The PMI was lowest as export orders expanded with the

rate of growth easing to the slowest due to power shortages which

also impacted vendor performance. Persistent power shortages

hampered production. The PMI in April fell to 51 reflecting the

weaker contribution from all five of its sector. Persistent power

shortages continued to hamper output. Similarly the index in May

fell to 50.1 due to persistent power outages which resulted in

weaker gains from incoming new work. The index for June was

50.3.The total new orders fell. The economic conditions were

fragile, resulting in lower demand. Reduced output levels and

production fell, amid evidence of tougher economic conditions and

persistent powercuts. In the month of July, the index dropped to

50.1 as output fell, amid evidence of falling new orders, tough

economic conditions and raw material shortages,suggesting that the

depreciation of rupee meant vendors were reluctant to import raw

materials. The index reduced to 48.5 in August, indicating a

deterioration of business conditions with both output and new

orders falling at faster rates. The depreciation of the rupee against

the US dollar had led to reluctance among vendors to import raw

materials. In September the index rose to 48.6 indicating a marginal

and slower deterioration of business conditions.A depreciation of

the rupee versus the US dollar had resulted in higher prices paid for

inputs and limited firms’ ability to price competitively. The PMI

remained unchanged in October indicating falling levels of

production, as business climate within an economy remained

tough.The weaker rupee had boosted foreign demand in the latest

month.The weaker rupee had led to higher prices paid for imported

raw materials and that additional cost burdens were partly passed

on. In November the index rose to 51.3 indicative of a slight

improvement in operating conditions. Due to powercuts, there was

difficulty in meeting the existing orders through stocks. The slight

drop was registered in PMI for December due to raw material

shortages at vendors and powercuts. In January, 2014 the index

rose to 51.4 signaling improvements in operating conditions during

the period. The PMI was further rose to 52.5 signaling a solid and

stronger improvement in business conditions. Pre-production stocks

fell in the latest month as raw material shortages at vendors’

unitsresulted in longer supplier delivery times. In March the index

dropped to 51.3 suggesting competitive pressures and shortages of

some raw materials hampered growth. The PMI for April remained

unchanged from March.Growth of output waned on the back of

competitive pressures and power outages.The index rose marginally

from 51.4 in May to 51.5 in June and the index was 17-month peak

of 53 in July, due to greater domestic and foreigndemand.

Conclusion:

The main reason for decline in index was persistent powercuts,

which hampered production and depreciation of rupee due to

which the vendors were reluctant to import raw materials. The

depreciation of currency increases the cost of imports for

automobile companies. Huge imports during 2013 by automobile

manufacturers increased the demand for US$ leading to further

weakening of rupee. This increased cost of imports increased the

prices of the automobile leading to fall in sales and profitability

margins. Decrease in profitability margins decreases the EPS and

makes the stock unattractive. This puts downward pressure on the

stock’s price thereby making it unattractive to invest.Source: HSBC

0

10

20

30

40

50

60

70

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Manufacturing Services composite

4) Index of Industrial Production (IIP) The IIP is an index for India which details out the growth of

various sectors in an economy such as mining, electricity

and manufacturing. It measures the short-term changes in

the volume ofproduction of a basket of industrial products

during a given period with respect to that in a chosen base

period.

The IIP numbers have direct co-relation to the stock market. It

decides the market movement. The rising IIP numbers indicate

growth in GDP. Thus, making economy an attractive destination for

foreign investment. The products included are manufacturing,

mining and electricity.

The Index of Industrial Production (IIP) rose by 3.4% in April, 2014,

as compared to the 1.5% growth in April, 2013. This was led by a

sharply higher-than-expected growth of capital goods. The IIP

growth was also supported by a moderate expansion in basic goods

and intermediate goods. However, the impact of same was offset by

a contraction in output of both consumer durables and consumer

non-durables in April, 2014.The pace of contraction of the IIP Index

for March 2014 is unchanged at 0.5%, with an improved

performance of basic goods (to 4.4% from 4.0%), intermediate

goods (to 1.6% from 0.6%) and capital goods (to -11.6% from -

12.5%) offset by a downward revision in growth of consumer non-

durables (to 5.0% from 7.2%). Notably, industrial growth has fallen

short of the growth displayed by the core sector industries for 18

consecutive months.

Reason for decreasing IIP

The reason for decrease in IIP is the sharp drop in main constituents

(manufacturing, mining and capital goods sector). The slow growth

in these sectors is the main reason for the lower IIP.

Rupee depreciation led to expensive imports for manufacturers,

thus increasing their cost of production which was ultimately passed

on to consumers. Another reason for decreasing IIP numbers is

persistent powercuts which reduced the production.

-40.00

-20.00

0.00

20.00

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

De

c-1

3

Feb

-14

Ap

r-1

4

Basic Goods Capital goods

Intermediate goods consumer goods

consumer durables consumer non-durables

IIP general

5) Foreign Institutional Investor FIIs are those institutional investors which invest in the

assets belonging to different countries than that where

these organizations are based. They exert strong influence

on the total inflows coming into the economy.Foreign

investors pulled out $8bn from domestic debt market.

Reasons for Negative FIIs

Policy constraints impacting investments

Tight Monetary Policy in response to rising inflation which

took toll on investment as well as consumption

Growing external headwinds

Uncertainty created by currency volatility

Sluggish growth in industrial sector

The worst sell-off happened in June, 2013 when FIIs pulled out

$5.3bn in a single month after the news in the market that the US

Fed could announce tapering by the end of the year. The

announcement sent the rupee on a downward spiral, increasing the

cost of hedging and reducing arbitrage opportunities in debt.

Arbitrageurs borrow from countries where interest rates are lower

and invest in countries where the rates are higher.

For traders in debt, the forward premiums went up so much with

the rupee’s fall that the arbitrage turned negative and nearly

impossible to do; that’s why there has been a huge pullout. The

rupee lost 12.37 percent in 2013 as it slipped from Rs 55 at the

beginning of the year. It even hit a record low of Rs 68.84 on August

28, 2013.

Reasons for Revival

FIIs increased since Narender Modi’s announcement as

Prime Minister mainly on a hope of a stable and reforms

oriented government

Appreciation of currency

2014 could be better as the fear of tapering has already been

discounted and the rupee is showing signs of stabilizing. However,

as the foreign premiums are still high, it is deterring foreign

investors; therefore, the revival could take a few more months.

-5.00

0.00

5.00

10.00Ja

n-1

2

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

IIP (y-o-y Growth) %

IIP (y-o-y Growth) %

Unfortunately, the real money investors have not yet come into

India. The forward premiums for short-term investors are still very

high and it could take a few months to ease.

Foreign investors were net buyers in December 2013 at Rs 5,370

crore. According to domestic Indian fund managers, foreign

investors are likely to come back a little later in the year.

After the actual Fed tapering announcement, foreign investors have

actually bought Indian debt. Interest rates have gone up to the

point where the attractiveness of debt has increased and investors

chase higher yields.

6) Foreign Direct Investment FDI is a direct investment into production or business in a

country by an individual or company of another country,

either by buying accompany in a target country or by

expanding operations of an existing business in that

country.FDI dipped 3%to $22.03bn in 2013-2014.

Reasons for FDI Outflow

Fiscal position

Slowdown in the world

Currency depreciation

Government policy of divestment

A decline in FDI would hurt the rupee, which had depreciated to a

record low of 68.85 against the US dollar on August 28 last year. It

has strengthened since then to about 60 level.

Services, pharmaceuticals, automobiles, construction development,

telecommunications, computer software and hardware, chemicals

and power were among the sectors that attracted foreign

investment in 2013. -60,000.00

-40,000.00

-20,000.00

0.00

20,000.00

40,000.00

60,000.00

13

-Jan

13

-Fe

b

13

-Mar

13

-Ap

r

13

-May

13

-Ju

n

13

-Ju

l

13

-Au

g

13

-Se

p

13

-Oct

13

-No

v

13

-De

c

Net Flow

7) Currency A system of money in general use in a particular country

Reasons for INR depreciation

Pull out of FIIs from India. The reason behind pull out was

announcement of tapering by US Fed by the end of the year. The

announcement sent the INR on a downward spiral, increasing the

cost of hedging and reducing arbitrage opportunities in debt.

Arbitrageurs borrow from countries where interest rates are lower

and invest in countries where the rates are higher.Huge imports by

the manufacturers put pressure on INR as the demand for US$ was

increased. This further weakened of INR.Inflationary pressure

during mid-2013 resulted in INR depreciation as people have to

spend more money to purchase the same amount of goods and

services. One unit of INR did not go as far as it used to and it lost

ground against other world currencies.

Impact of INR depreciation

The depreciation of currency increases the cost of imports for

manufacturing companies. Huge imports during 2013 by

manufacturing companies increased the demand for US$ leading to

further weakening of INR.The currency depreciation reduces the

Forex reserve of country.Inflation also occurred as imports are more

expensive leading to increase in cost of goods and services.But at

same time exports from IT sectors increased and many IT firms

experienced profit out of currency depreciation.

8) Credit Growth and Deposit Growth

0

5,000

10,000

15,000

20,000

25,000

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

De

c-1

3

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

(In Rs. Crore)

(In Rs. Crore)

56

58

60

62

64

66

68

70

1/8

/20

13

6/8

/20

13

12

/8/2

01

3

16

/08

/20

13

21

/08

/20

13

26

/08

/20

13

29

/08

/20

13

3/9

/20

13

6/9

/20

13

12

/9/2

01

3

17

/09

/20

13

20

/09

/20

13

25

/09

/20

13

30

/09

/20

13

4/1

0/2

01

3

9/1

0/2

01

3

14

/10

/20

13

18

/10

/20

13

23

/10

/20

13

28

/10

/20

13

31

/10

/20

13

USD

USD

Credit Growth- a contractual agreement in which a

borrower receives something of value now and agrees to

repay the lender at some date in the future, generally with

interest. It also refers to borrowing capacity of an individual

or company.

During Q1 of 2013-14, liquidity conditions improved considerably

and broad money growth broadly remained in line with the

indicative trajectory. Credit growth decelerated with the slack in

economic activity and deterioration in asset quality. With capital

outflows, wide CAD and high CPI the RBI kept the repo rate

unchanged in order to restore stability in the Forex market. Credit

growth was high when US announced tapering, as a result of which

the FIIs flowed out of country. The investors moved to the banks for

loans as inflation trends lower and alternative assets such as gold or

even equities give poor returns.

The widening wedge between the deposit and credit growth has

been a key structural factor behind worsening liquidity conditions in

India. The lack of credit growth prompts the banks to increase their

investments in government securities. Falling credit growth could

persuade banks to pass on rate cuts even at an expense to their

margins.

In March, 2014the systems deposit growth continues to be higher

than the credit growth, owing to slow economic growth. The credit

grew 14.56% while deposits rose 15.5% on y-o-y basis. High interest

rates also contributed to the sluggish credit growth.The

improvement in credit growth and deposit growth was seen after

the announcement of Mr. Narender Modi as the prime minister

candidate. The news sent optimism among investors of better

economic conditions.

9) Consumer Outlook Index The Consumer Outlook Index is a barometer of consumer

confidence, reflects current and future spending plans,

employment and inflation outlook of urban Indian

consumers. The score above 50 indicates optimism and

score below 50 indicates pessimism.Consumer Outlook

Index is a monthly measure of consumer sentiment in India.

0

5

10

15

20

25

20

-Ap

r-1

2

20

-Ju

n-1

2

20

-Au

g-1

2

20

-Oct

-12

20

-De

c-1

2

20

-Fe

b-1

3

20

-Ap

r-1

3

20

-Ju

n-1

3

20

-Au

g-1

3

20

-Oct

-13

20

-De

c-1

3

20

-Fe

b-1

4

20

-Ap

r-1

4

20

-Ju

n-1

4

Credit Growth Deposit Growth

a) Inflation Sentiment Index tracks felt and expected by

consumers.

b) Employment Sentiment Index reflects consumers’

perception of the prevailing and expected employment

situation in India

c) Spending Sentiment Index measures consumers’ overall

spending plan on necessities as well as discretionary

purchases for the next few months.

January 2013

The Consumer Confidence Index (CCI) of India for January fell to 38,

indicating growing pessimism among Indian consumers. Data

reveals weak sentiments about future employment conditions with

resultant expectations of lowered household income contributing to

the decline. Inflation index rose 0.7 points to 23.9. The Employment

and Spending index weakened further by 0.5 points to 43.9 and 0.9

points to 23.4 respectively. The Inflation Sentiment Index improved

with the current monetary policy reforms. The Spending Sentiment

Index was at its lowest because of rising discomfort about

borrowing in Indian consumers.

February 2013

The CCI of India for February remains unchanged (38 since January)

showing no improvement in pessimism about employment and

inflation. A continued perception among Indian consumers of

weakness in the overall economy is decreasing willingness to spend.

March 2013

The CCI of India for the month of March has risen to 41.8, 1.1 point

increase over last month. This uptick indicates that in spite of being

in the slightly pessimistic range the consumer sentiment is showing

some signs of improvement, suggesting a possible reversal in the

consumer mood.

April 2013

After the recovery in March, the CCI for April fell by 0.4 points to

41.1, on account of rising concerns about job security among

consumers. The Employment Sentiment Index stood at 50.4,

registering a fall of 1.3 points. The Present Situation index which

measures consumer confidence in the current economy, decreased

slightly by 0.1 points to 44.6. The Future Expectations Index, which

measures consumer outlook for next 12 months, also declined by

0.5 points to 40, suggesting increasing pessimism about the future.

The Inflation Sentiment Index improved by 1.3 points to 27.2. The

Spending Sentiment Index witnessed a marginal uptick of 0.9 points

to 31.1.

May 2013

The CCI was 41.4 for the month of May, an uptick of 3.4 points since

the beginning of the year. The Inflation Sentiment Index rose to

26.8. The Spending Sentiment index improved to 30.5. The

Employment Sentiment Index declined to 50.2. The Present

Situation Index and Future Expectations Index have registered score

of 46 and 40 respectively.

June 2013

The CCI was 41.9 for the month of June, the uptick of 0.5 points

since last month. The Inflation Sentiment Index increased by 0.7

points.

July 2013

The CCI registered a score of 40.8 for the month of July, 2013, a dip

of 1.1 points from the previous month.

August 2013

The Consumer Outlook Index (earlier known as Consumer

Confidence Index of India) fallen by 0.3 points registering a score of

40.5. The number indicated the rising pessimism on the part of

consumers towards the state of the economy. The Inflation

Sentiment Index registered a fall of 0.4 points to the level of 27.2.

The spiraling rupee is one of the most important factors that is

affecting inflation sentiment and dragging it down. The Spending

Sentiment Index has improved recording a 0.3 point jump to reach

31.2 for this month. The Present Situation Index is at 42.3 after a

decline of 1.2 points. The Future Expectation Index is stable at 39.7

suggesting deepening pessimism from consumer stand point. The

Employment Index declined by 0.7 points to 49.1.

September 2013

The COI slipped by 1.4 points to 39.1, which indicates pessimism

amongst the consumer. The Inflation Sentiment Index has declined

to 24.1, lower by 3.1 points; consumers expect both prices and rates

to increase further. The Employment Sentiment Index was 49.7.

The Spending Sentiment Index remained flat at 30.7 lower by 0.5

points.

October 2013

The COI was 39 reflecting the pessimism amongst consumers. It

declined by 0.1 points. The Present Situation Sentiment Index

improved slightly by 0.5 points to 39.6 while the Future Expectation

Situation Index weakened further by 0.4 points to 38.7 indicating

consumers being more pessimistic. The Inflation Sentiment Index is

at 22.7, the score is at its lowest as consumers expect prices to

increase in the near future. The Spending Sentiment Index increased

marginally to 31.3, a rise of 0.6 points, the score continues to

indicate deep pessimism. The Employment Sentiment Index climbed

by 0.2 points to 49.9.

If the level crosses 50 in the following months, the rise in confidence

towards employment opportunities may lend some support to the

overall Consumer Outlook Index.

November 2013

The COI was 39.8 and witnessed a moderate uptick of 0.8 points.

The Inflation Sentiment Index rose by 1.3 points with a score of 24

indicating a decline in the pessimism. The Employment Sentiment

Index is at 50.4. The Spending Sentiment Index remained flat at a

pessimistic level of 30.9.

December 2013

The COI registered a score of 40.2, an uptick of 0.4 points. The

Inflation Sentiment Index rose by 0.3 points to 24.3. The Spending

Sentiment Index moved up by 2.0 points to sore 32.9. The

Employment Sentiment Index again slipped into pessimism zone.

The index fell by 0.6to 49.8 due to growing pessimism around job

security. The Present Situation Sentiment Index remained flat at

40.4 while the Future Expectation Situation Index increased by 0.7

points to reach 40.1.

January 2014

The COI registered a score of 42.1, an uptick of 2.0 points. The

Employment Sentiment Index has moved back into optimistic

territory to 51.3 points with a jump of 1.5 points, indicating decline

in the pessimism around the unemployment and job security. The

Inflation Sentiment Index fell by 0.5 points to 23.8, indicating

consumers’ worries about increase in interest rates.

February 2014

The COI was registered a score of 42.6, an uptick of 0.5 points. The

overall Economic Sentiment Index improved by 1.9 points to 59.3.

The Employment Sentiment Index remains optimistic with a score of

50.4. The Inflation Sentiment Index remains flat at 23.3, still

reflecting strong pessimism. The Spending Sentiment Index remains

low. The index declined by 2.4 points to 29.6. The Future

Expectations Index, at 43.1, recorded a score that was 1.9 points

higher than the Present Situation Index.

March 2014

The COI registered a score of 42.2 and witnessed a slight decline of

0.4 points. The Employment Sentiment Index improved to 51. The

Inflation Sentiment index also improved to 25.1. The Spending

Sentiment Index declined to 29, the key reason for the overall dip in

the COI.

April 2014

The COI was registered declined to 40.6 from 42.2; this is primarily

due to the sharp fall in the consumers’ willingness to spend. The

Employment Sentiment Index improved to 51. The Inflation

Sentiment Index remains at 25.1, indicating the inflation sentiment

is stabilizing. The Spending Sentiment Index declined to its lowest-

ever level of 25.9, this is the key reason for overall decline in COI.

May 2014

The COI improved to 42 from 40.6, increase was the willingness of

consumers to spend in coming months. The Inflation Sentiment

Index moved up to 25.6, reflecting a moderate improvement in

sentiment towards inflationary condition. The Spending Sentiment

Index improved to 28.1. The Employment Sentiment Index

improved marginally to 51.7.

June 2014

The COI improved to 44.3 marking an increase of 2.3 points, the

improving willingness to spend accounts majorly for the positive

gains registered by the overall index. The Inflation Sentiment index

moved up to 28.2. The Spending Sentiment Index increased to 30.4.

The Employment Sentiment Index improved to 53.9, up 2.2 points,

on the hope that the new government at centre.

July 2014

COI for July 2014 indicates that the consumer spending is bound for

gradual recovery. The COI stood at 44.2, 0.1 points lower than

previous month. The Spending Sentiment Index increased to 33.4

from 30.4 in June 2014. The Inflation Sentiment Index dropped 3

points and stood at 25.5 from 28.2 in June 2014. The Employment

Sentiment Index registered a score of 52.5 as compared to 53.9 in

June 2014.

10) Gross Fixed Capital Formation

GFCF is a component of the expenditure on GDP, and thus

shows something about how much of the new value added

in the economy is invested rather than consumed.

Reason for rise in GFCF

a) The upcoming general elections

b) Lower interest rates to stimulate economic activity

Lowering interest rates would mean increase in

investment activities thereby increasing the GDP

c) Policy and reforms

Policy and reforms in the FDI and investment result in

increased economic activity.

0

10

20

30

40

50

60

Inflation Index Employment Index

Spending Sentiment Index COI

11) Balance of Payment

A statement that summarize an economy’s transactions

with the rest of the world for a specified time period

In 2011-12, the CAD expanded from 17,541 in Q1 to 21,768 in Q2.

Huge imports put pressure on the CAD. The similar trend was

witnessed from Q1-Q3 in 2012-13 (the deficit further widened from

16,932 to 31,857), but deficit decreased to 18,078 in Q4 of 2012-13

due to fall in gold imports. With ease in CAD the rupee recovered

against dollar. Further, the CAD decreased to 1,210 in Q4 of 2013-

14. The lower CAD was primarily on account of a decline in the trade

deficit as merchandise exports picked up and gold import

moderated.

The capital account decreased (yet positive) from 23,923 in Q1 to

16,586 in Q4 of 2011-12. But the capital account increased from

420,000

440,000

460,000

480,000

500,000

520,000

540,000

560,000

2012-2013 2013-2014

GFCF at Market Price

Q1 Q2 Q3 Q4

(40,000)

(30,000)

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2011-12 2012-13 2013-14

Current A/c Capital A/c BoP / Change in Reserve assets

16,374 in Q1 of 2012-13 to 20,457 in Q4. The capital account was

negative (-4,769) in Q2 of 2013-14 due to outflow of FIIs from India.

In the third quarter, the FDI and portfolio investment recorded an

inflow. Within portfolio investment, the debt segment showed net

outflow which, however, was offset by net inflows of equity.

The currency of a country with positive BoP appreciates and country

with negative bop depreciates. If currency depreciates, the CAD

increases. Outflow of FII and FDI depreciates the currency.

Outflow of FII and FDI from India in 2013 depreciated the Rupee

leading to negative capital account balance.

Impact on Stock Prices

The impact of indicators on stock price

1) Inflation

In a long run the inflation influences the stock price and

that too in positive direction.Unexpected inflation raises

the firm’s equity value if they are net debtor. Similarly

tightening of monetary policy can reduce inflation and

stock prices both as individuals will be left with less

money to buy goods or buy stocks.

2) Interest Rate

Increase in interest rates (i.e. RBI adopting tight

monetary policy) can reduce stock prices as individuals

will be left with less money to buy goods or stock.

3) IIP

The IIP numbers have direct co-relation to the stock

market. It decides the market movement. The rising IIP

numbers indicate growth in GDP. Thus, making economy

an attractive destination for foreign investment. The

products included are manufacturing, mining and

electricity.

4) FIIs and FDI

The FIIs and FDI bot encourage production in an

economy, thereby increasing profit margins. The FIIs are

more volatile than FDI. They directly influence the stock

price.

5) Currency Volatility

When currency depreciates the IT companies or

companies that export goods, profit from it. Thus, the

demand for their stock will increase and hence stock

price also increases. Whereas, when the currencies

appreciates the companies that rely on import of raw

materials benefits more. Their profitability improves and

demand for their stock is increased, thereby increasing

stocks’ price.

6) Credit and Deposit Growth

Higher credit and deposit growth sent a positive

sentiment among investors about improvement in

economic conditions. A better economic conditions lead

to increase in stock prices.

7) Consumer Outlook Index

A positive outlook moves the stock price in a positive

direction.

8) GFCF

GFCF is co-integrated indicating an existence of long run

equilibrium relationship between the two.