How does the economy affect the stock market


moneycontrol noteindia
moneycontrol noteindia

Table of content

  • Monetary policy
  • Repo Rate
  • Reverse Repo Rate
  • Cash Reserve Ratio
  • Inflation
  • Wholesale Price Index
  • Consumer Price Index
  • Industrial production rate
  • Budget
  • Purchasing Manager Index

Before entering the stock market, you not only have to look at the profit and loss of the company, you also have to keep an eye on the government and non-government events that affect the market in which financial and non-financial events take place.

Related this:- How do certain economic events affect the stock market

Monetary policy

The central bank i.e. Reserve Bank of India controls the supply of money in the market by bringing monetary policy and for this, the central bank uses interest rates RBI ups and downs the interest rates due to which the supply of cash increases or decreases RBI India Similarly, in all the countries of the world, there is a central bank which determines the interest rates.

RBI fixes interest rates keeping in mind that there is a balance between growth and inflation.

If the RBI fixes the interest rate above, then it will be difficult for the company to take loans and the expansion of the company will stop due to not taking the loan, thus the economy will slow down.

And if the RBI fixes the interest rate lower, then it will be easier to get loans, this will increase the expansion of companies and there will be more cash in the hands of the company and in the hands of the customers when the customers have more money in their hands, then they should spend more to take advantage of it. For this, the company increases the price of its goods.

To maintain the balance of growth and inflation, RBI fixes interest rates only after considering all these things, if interest rates are unbalanced, then the economy can go into trouble, RBI has to keep an eye on the following rates

Repo Rate - When banks need loans, they take loans from RBI, the rate at which RBI gives loans to banks is called the repo rate. If the repo rate is high then it becomes costly to take loans and the bank takes fewer loans, which slows down the pace of growth, currently, the repo rate in India is 8%, the banks do not like to increase the RBI repo rate.

Reverse Repo Rate - Reverse Repo Rate is the rate of interest at which RBI borrows from banks. When the Reserve Bank of India takes loans from banks, the banks will happily lend because they know that RBI will not mess up and when the companies are taxed.

 There is a risk of error at the time of lending, but when the bank gives the tax to the Reserve Bank of India, the supply of cash in the market decreases, making it difficult for companies to get loans. This is not considered good for companies as it makes it difficult for companies to get loans. At present, the rate of reverse repo rate in India is 7%.

Cash Reserve Ratio - All banks have to keep some cash with the RBI, how much this amount will depend on the amount of cash reserve ratio, if the cash reserve ratio is high, then more cash leaves the market and goes to RBI This is not considered good for the economy.

RBI thinks to change all these rates every 2 months, the stock market monitors this meeting and its decision, due to change in rate, it has an effect in the stock market. Due to which it has an impact on sectors like the banking sector, automobile sector, housing finance, and retail assets.


Inflation is the continuous increase in the price of goods and services, the buying power of the rupee decreases when inflation is high, that is, fewer goods and services can be bought for every rupee, the price of onions increases from ₹ 20 to ₹ 40. Inflation is a common phenomenon,

 but a high inflation rate is not considered good, due to which there is pressure in the economy, the government always tries that the rate of inflation does not go above a certain limit Inflation An index is used to measure inflation, depending on the percentage increase or decrease in this index, inflation is said to be going up or down.

There are two types of indices that measure inflation, the Wholesale Price Index and the Consumer Price Index.

Wholesale Price Index - The wholesale price index refers to the change in price at the wholesale level, it is the price at which one company sells the same to another company.

Consumer Price Index - Consumer Price Index It shows the price changes in the retail market. It is important for the consumer to measure the consumer price index. To measure the consumer price index, a lot of calculations have to be done because it can differentiate between rural and urban and so on.

 Key and is divided into many classes, each such category has its own index and by combining all these indices a consumer price index is prepared.

Industrial production rate

Industrial production rate or tells how the industrial sector of the country is doing in a short period of time. Tells the production, the production is measured on the basis of a certain scale, now in India, the production from 2004 to 2005 is considered as the scale, on which the scale is called the base year.

The ministry collects these data and releases the Industrial Production Rate Index. If the IIP rises or it is believed that there is a good environment for the industry in the country as the production appears to have increased, both the market and the economy consider it good.

 If the decrease in IIP is not considered good, it is considered to be a sign that the country does not have a good environment for production and this makes the economy market bad for both.


Budget is a process in which the Finance Ministry discusses the economic condition of the country, on behalf of the Ministry of Finance, the Finance Minister presents the budget in front of the country. There is a direct impact on the market, so the budget is considered an important event of the economy.

Purchasing Manager Index

Purchasing Managers Index is an index that shows the activities in the production and services sector. This index is made on the basis of a survey, in which people who buy goods for companies, 

these people are compared to the previous month. Give your assessment on what has changed in this month, a separate survey is done for the production sector and a separate survey is done for the services sector, later an index is made by combining the survey of both the sectors. Provides information about orders, production, business expectations, and employment

Purchasing Manager's Index figure is around 50. Above 50 it is considered that the economy is growing. If the figure goes below 50, then the economy is considered to be in decline. Size of 50 means that there has been no change in the economy.

Announcement of financial results of companies

The announcement of the financial results of the company has the most impact on the market, due to which the stock market gives its process immediately. All the companies listed in the stock market have to present their business results every third month. gives all information.

  • How much profit has the company made
  • How does the company run its expenses
  • How much money the company has paid as taxes and interest rates
  • How much profit did the company make in the quarter

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