The Indian stock market is affected by numerous factors and knowing these factors will help you decide when to enter or exit while buying and selling shares. As a smart investor, you should keep track of the following factors that can have a profound effect on your investment plans and strategies.
1. Monetary Policies by RBI
RBI periodically announces monetary policies and changes in the interest rates. When the RBI reduces interest rates, the stock market performs well. On the other hand, if the rate is increased, the stock market’s performance is not too good. Share prices rally when there is a reduction in the interest rates but prices fall when there is a hike. Likewise, if the monetary policies of the RBI cause increase in liquidity, the stocks will perform well. The reverse happens when the liquidity is low.
2. Commodity Prices
You may be using your demat account online to trade commodities and that means you know that India imports several commodities like crude oil, copper, and natural gas. An increase in commodity prices causes a rise in the input costs for companies. Some commodity prices can increase inflation, causing interest rate increases. That, in turn, adversely affects the stock markets.
3. Union Budget
The Union Budget has a profound effect on the performance of the stock markets. The fiscal deficit announcement during the budget, incentives to different sectors, money allocated to new and existing infrastructure projects, and other announcements during the Union Budget have a significant effect on the stock markets. When the finance minister reads the budget and companies in certain sectors perform overwhelmingly well and you can make a tidy profit if you happen to have shares of those companies and sell them at the right time.
Each month, when the government announces inflation, it can affect the stock markets. High inflation results in the RBI increasing interest rates. That can cause the stock market to plunge. On the other hand, low inflation means rate cut or status quo, and that is viewed positively by the stock markets.
5. Financial Results Announced by Companies
When companies announce their financial results quarterly, half-yearly, and annually, it can affect the share prices of those companies and also the sectors they operate in. If financial results are good, the share prices will increase. If the results are not as anticipated, the share prices will fall.
6. Exchange Rate
The Indian rupee is influenced and valued against the US dollar. So, if the rupee suddenly depreciates, it adversely affects investments by foreign investors. It can cause foreign investors to sell their investments and exit the Indian stock markets. It is prudent to note that steady depreciation, on the other hand, has a positive effect on the share markets and you will be happy to keep using your online trading account in India.
7. Central Government Policies
Policies for specific sectors by the government can affect the stock prices of companies in those sectors. Usually, you will notice that the stock markets behave positively when policies are announced so you could benefit from them.
8. FDI and FPI Policies
When the government announces an increase in FDIs and FPIs, stock markets will rally. That is because there will be an influx of capital by foreign entities in companies and result in their share prices increase.
9. Political Stability
When the government at the center has a clear majority, it can undertake reforms and ensure economic development. Usually, it is common to see stock markets rally and perform well during the term of a majority government. Coalition governments have the opposite effect as it leads to policy paralysis.
10. Natural Disasters, Epidemics, and Pandemic
The recent pandemic has taken a toll on the stock markets in India. The markets were not prepared for the effects of the pandemic and witnessed one of the biggest falls in recent times. Stock markets are also affected by natural disasters, such as floods, drought, tsunamis, and earthquakes.
These are the 10 essential factors that affect the stock markets in India. Make sure that you prudently diversify your portfolio so that you can tide over any of the negative effects these factors may have on the stock markets.