Financial markets trigger greed and fear. People have a different view on the same stock or a bond, which helps create a healthy market. Emotions of greed and fear induce the demand and supply needed to keep price equilibrium.
This column has often argued in favour of knowledge before putting your money on the line. Your finances are dependent on your ability to assimilate macro and microdata points. These factors influence your money and effectively your ability to save and invest efficiently.
The good for your money
Any information that suggests better economic growth is good for markets and your money.“Our overarching priority is that growth impulses are nurtured to ensure a durable recovery along a sustainable growth path with stability,” said Shaktikanta Das, governor of the Reserve Bank of India (RBI), last week. The monetary policy committee of the RBI kept vital borrowing rates unchanged last week.
The simple explanation for the statement is that the RBI would continue to support economic growth by keeping interest rates low for as long as it is necessary. That is good news for the markets because businesses can borrow money at a reasonable rate.
Goods and Services Tax
The Goods and Services Tax (GST) monthly collection is emerging as a lead indicator of economic activity. There is growth in the collection made recently over previous months and last year. All of that is good for the market. A rising GST monthly collection trend indicates an increase in spending since it is an expenditure tax. Despite widespread criticism of high fuel taxes, the government continues to take a hard line and maintain them. A robust tax collection helps government allocate resources towards capital spending and emergency needs.
So, if you read about it, you must hope for better government interventions in the light of the pandemic. At the same time, it also reduces the government dependence on market borrowing. It rose sharply in 2020-21 due to the first and the second wave of the pandemic. That puts pressure on the government finances and reduces the availability of money for businesses to borrow. For now, it is not hurting so much as the credit demand from companies is low. However, as the economic activity picks up, they may need more money. If the government takes away the money in the banking system to meet expenditure, it will put pressure on interest rates.
The bad for your money
The consumer price inflation rate continues to be a concern. The RBI’s monetary policy committee has called for a joint effort from the central and state governments to bring down fuel prices. The committee noted that the economy continues to face supply shocks that cause problems in bringing necessary goods to the market efficiently. As prices of critical goods that businesses and individuals consume remain high, the RBI’s ‘accommodative’ monetary policy stance could be at risk. Professor Jayanth R Varma, an RBI monetary policy committee member, has already voiced dissent about the RBI stance. While he supported the decision to leave borrowing rates unchanged, he expressed reservations about supporting growth in the light of inflation risks ahead.
Any sudden rise in consumer price inflation could hurt RBI’s ability to keep borrowing rates low. In a situation where economic growth is shaky and still not near pre-pandemic levels, firm borrowing rates would be bad news. It would hurt business expansion when it is needed the most. Companies need to enhance their economic activity but expand existing capacity to create new jobs.
What do you do
You need to observe these trends. When you read reports, keep an eye on the way these trends influence businesses. Listed companies announce financial results regularly. They often put out the commentary on the impact of inflation and other macro-economic factors on their business.
The RBI committee has observed that input prices for companies are rising, but they cannot pass it on to consumers due to weak demand. The ability of a business to successfully price products or services matters from the profitability standpoint. That would make or break a company’s share price.
3.61 per cent increase recorded in the Sensex index over the past month.
(The author is editor-in-chief at www.moneyminute.in)