As an investor who would not like to know where the economy (India) is headed and what is going on in the economy. If you have a big picture as to what is happening in the Economy, you will be in a much better position to plan your investments.
The performances of financial markets are influenced by a host of reasons. From government reforms and policies, inflation data, to quarterly results of the company etc., has a strong bearing on market performances.
There are certain very important indicators that can give an overall idea on the Economy. These are referred to as Macro Economic Indicators.
What are Economic Indicators?
An economic indicator could be considered as any piece of information that can help you (investor) understand what is going on in the economy. Economic Indicators are classified as Macro and Micro factors.
The Macro economic indicators are concerned with how the overall economy works. These indicators can be Gross Domestic Product (GDP), Industrial Production data, Inflation levels, interest rates etc.,
Whereas, the Micro Indicators give you an idea on how supply and demand interact in individual markets for goods & services. For example, whether price rises in the automobile industry are driven by supply or demand changes.
Major Macro Economic Indicators you need to watch
Below are some of the major macro-economic indicators that you need to track regularly;
- Gross Domestic Product (GDP)
- What is GDP? – It is the market value of all goods and services produced in the country.
- A positive forecast of GDP growth can lead to positive impact on Equity markets over a period of time.
- As per the CSO (Central Statistical Office), India’s GDP growth at constant market prices is projected to increase to 7.6 % in FY 2016 from 7.2% in FY 2015, making it amongst the fastest growing large economies in the world. As per the World Bank’s report, India’s GDP growth will remain strong at 7.6 percent in 2016 and 7.7 percent in 2017.
- But there are various factors that can affect GDP especially rainfall & Govt’s policies.
- Industrial Production – It is measured by the Index of Industrial Production (IIP). Industrial production indirectly affects your investments. If IIP numbers are good, it can lead to high GDP growth rate and hence, higher household incomes/savings.
- The Twin Deficits
- Fiscal Deficit and Current Account Deficit (CAD) are referred to as the twin deficits.
- Fiscal deficit is the difference between the government’s expenditures and its revenues.
- Whereas, CAD is the difference between exports and imports by a country. If the value of imports exceeds the value of exports by a country, it leads to CAD.
- CAD is one of the major macro factors that can affect your investments directly. If the deficit is not at manageable levels, the Govt may take necessary corrective steps to bring it under control. For example – to curb gold imports, couple of years back govt has hiked import duty on Gold, which lead to increase in Gold prices.
- We import Oil from foreign nations. So, low levels of Oil prices can lead to lower CAD in India and vice-versa.
- Generally, high CAD results in higher interest rates and low CAD results in lower interest rates. A shrinking CAD can also lead to low levels of Inflation.
- If you look at current estimates, Fiscal Deficit as percentage of GDP (at 3.9% for FY 2016 and 3.5% for FY 17 estimate) and Current Account Deficit as percentage of GDP (projected at 1.4% of GDP in FY 2016 estimate) are well within the comfort zone.
- Inflation – It can be defined as either a rise in prices or a fall in the value of money. Inflation directly impacts your finances and monthly budget. Higher inflation leads to low purchasing power. High inflation leads to lower real rate of Return.
- Interest Rates
- One of the primary functions of RBI is to control the supply of money in the economy and also ‘the cost of credit.’
- These two things (Supply of money and cost of credit) are closely monitored and controlled by RBI. The inflation and growth in the economy are primarily impacted by these two factors.
- To control inflation and the growth, RBI uses certain tools like Cash Reserve Ratio, Statutory Liquidity Ratio, Repo Rate, Reverse Repo-rate etc.,
- Acceptable or lower retail inflation levels has lead to RBI decreasing the Repo Rate (the rate at which RBI lends to commercial banks), in its latest credit policy review (Oct’16).
- Low inflation can lead to lower interest rates (deposit & loan rates). In a falling interest rate environment, debt mutual funds can give you decent returns. In such scenarios, you can consider short-term debt funds for your short-term goals. (Read: ‘What is CRR/SLR/Repo-rate/Reverse Repo-rate?‘)
Ideally, lower Current Account Deficit, interest rates and inflation on the one side and higher GDP growth, Industrial Production & Forex reserves on the other side, can lead to higher employment generation, increased Household Savings rate and better Purchasing Power for the common man. Stable government, efficient Budget proposals, good monsoon etc., are also major macro factors to watch out for.
Kindly note that all the above factors are inter-linked. Besides macro economic indicators, the micro factors and external factors (like geo-political, performance of international financial markets etc.,) would also affect your investments.
You can find India Macro Economic Indicators data in the below couple of websites;
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on : 18-October-2016)