Module 1 Introduction to Stock Markets

Chapter 12

Key Events and Their Impact on Markets

124

12.1 – Overview

For a market participant transacting just based on company specific information may not be sufficient. It is also important to understand the events that influence the markets. Various outside factors, economic and/or non-economic events have a key impact on the performance of stocks and markets in general.

In this chapter we will try to understand some of these events, and also how the stock market reacts to them.

12.2 – Monetary Policy

The monetary policy is a tool with which the Reserve Bank of India (RBI) controls the money supply by controlling the interest rates. They do this by tweaking the interest rates. RBI is India’s central bank. World over every country’s central bank is responsible for setting the interest rates.

While setting the interest rates the RBI has to strike a balance between growth and inflation. In a nutshell – if the interest rates are high that means the borrowing rates are high (particularly for corporations). If corporate can’t borrow easily they cannot grow. If corporations don’t grow, the economy slows down.

On the other hand when the interest rates are low, borrowing becomes easier. This translates to more money in the hands of the corporations and consumers. With more money there is increased spending which means the sellers tend to increase prices leading to inflation.

In order to strike a balance, the RBI has to consider all the factors and should carefully set a few key rates. Any imbalance in these rates can lead to an economic chaos. The key RBI rates that you need to track are as follows:

Repo Rate – Whenever banks want to borrow money they can borrow from the RBI. The rate at which RBI lends money to other banks is called the repo rate. If repo rate is high that means the cost of borrowing is high, leading to a slow growth in the economy. Currently, the repo rate in India is 8%. Markets don’t like the RBI increasing the repo rates.

Reverse repo rate – Reverse Repo rate is the rate at which RBI borrows money from banks. When banks lend money to RBI they are certain that RBI will not default, and hence they are happier to lend their money to RBI as opposed to a corporate. However when banks choose to lend money to the RBI instead of the corporate entity, the supply of money in the banking system reduces. An increase in reverse repo rate is not great for the economy as it tightens the supply of money. The reverse repo rate is currently at 7%.

Cash reserve ratio (CRR) – Every bank is mandatorily required to maintain funds with RBI. The amount that they maintain is dependent on the CRR. If CRR increases then more money is removed from the system, which is again not good for the economy.

The RBI meets every two months to review the rates. This is a key event that the market watches out for. The first to react to rate decisions would be interest rate sensitive stocks across various sectors such as – banks, automobile, housing finance, real estate, metals etc.

12.3 – Inflation

Inflation is a sustained increase in the general prices of goods and services. Increasing inflation erodes the purchasing power of money. All things being equal, if the cost of 1 KG of onion has increased from Rs.15 to Rs.20 then this price increase is attributed to inflation. Inflation is inevitable but a high inflation rate is not desirable as it could lead to economic uneasiness. A high level of inflation tends to send a bad signal to markets. Governments work towards cutting down the inflation to a manageable level. Inflation is generally measured using an index. If the index is going up by certain percentage points then it indicates rising inflation, likewise index falling indicates inflation cooling off.

There are two types of inflation indices – Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Wholesale Price Index (WPI) – The WPI indicates the movement in prices at the wholesale level. It captures the price increase or decrease when they are sold between organizations as opposed to actual consumers. WPI is an easy and convenient method to calculate inflation. However the inflation measured here is at an institutional level and does not necessarily capture the inflation experienced by the consumer.

As I write this, the WPI inflation for the month of May 2014 stands at 6.01%.

Consumer Price Index (CPI)– The CPI on the other hand captures the effect of the change in prices at a retail level. As a consumer, CPI inflation is what really matters. The calculation of CPI is quite detailed as it involves classifying consumption into various categories and sub categories across urban and rural regions. Each of these categories is made into an index. This means the final CPI index is a composition of several internal indices.

The computation of CPI is quite rigorous and detailed. It is one of the most critical metrics for studying the economy.  A national statistical agency called the Ministry of Statistics and Programme implementation (MOSPI) publishes the CPI numbers around the 2nd week of every month.

The CPI stands at 8.28% for the month of May 2014. Here is a chart for the inflation for the last one year in India.

M1-ch12-chart-1

As you can notice, the CPI inflation has kind of cooled off from the peak of 11.16% in November 2013. The RBI’s challenge is to strike a balance between inflation and interest rates. Usually a low interest rate tends to increase the inflation and a high interest rate tends to arrest the inflation.

12.4 – Index of Industrial Production (IIP)

The Index of Industrial Production (IIP)  is a short term indicator of how the industrial sector in the country is progressing. The data is released every month (along with inflation data) by Ministry of Statistics and Programme implementation (MOSPI). As the name suggests, the IIP measures the production in the Indian industrial sectors keeping a fixed reference point. As of today, India uses the reference point of 2004-05. The reference point is also called the base year.

Roughly about 15 different industries submit their production data to the ministry, which collates the data and releases it as an index number. If the IIP is increasing it indicates a vibrant industrial environment (as the production is going up) and hence a positive sign for the economy and markets. A decreasing IIP indicates a sluggish production environment, hence a negative sign for the economy and markets.

To sum up, an upswing in the industrial production is good for the economy and a downswing rings an alarm. As India is getting more industrialized, the relative importance of the Index of Industrial Production is increasing.

A lower IIP number puts pressure on the RBI to lower the interest rates. The following graph shows the change in IIP in percentage terms for the last 1 year.

M1-ch12-chart-2

12.5 – Purchasing Managers Index (PMI)

The Purchasing managers index (PMI) is an economic indicator which tries to capture the business activity across the manufacturing and service sectors in the country. This is a survey based indicator where the respondents – usually the purchasing managers indicate their change in business perception with respect to the previous month. A separate survey is conducted for the service and the manufacturing sectors. The data from the survey is consolidated on to a single index. Typical areas covered in the survey include factors such as new orders, output, business expectations and employment amongst others.

The PMI number usually oscillates around 50. A reading above 50 indicates expansion and below 50 indicates a contraction in the economy. And a reading at 50 indicates no change in the economy.

12.6 – Budget

The Budget is an event during which the Ministry of Finance discusses the country’s finance in detail. The Finance Minister on behalf of the ministry makes a budget presentation to the entire country. During the budget, major policy announcements and economic reforms are announced which has an impact on various industries across the markets. Therefore the budget plays a very important role in the economy

To illustrate this further, one of the expectations for the budget (July 2014) was to increase the duties on cigarette. As expected, during the budget, the Finance Minister raised the duties on cigarette, and hence the prices of cigarettes were also increased. An increased cigarette price has a few implications:

  1. Increased cigarette prices discourage smokers from buying cigarettes (needless to say this is a debatable) and hence the profitability of the cigarette manufacturing companies such as ITC decreases. If the profitability decreases then investors may want to sell shares of ITC.
  2. If market participants start selling ITC, then the markets will come down because ITC is an index heavy weight.

In fact as a reaction to the budget announcement ITC traded 3.5% lower for this precise reason.

Budget is an annual event and it is announced during the last week of February. However under certain special circumstances such as a new government formation the budget announcement could be delayed.

12.7 – Corporate Earnings Announcement

This is perhaps one of the important events to which the stocks react. The listed companies (trading on stock exchange) are required to declare their earning numbers once in every quarter, also called the quarterly earning numbers. During an earnings announcement the corporate gives out details on various operational activities including..

  1. How much revenue the company has generated?
  2. How has the company managed its expense?
  3. How much money the company paid in terms of taxes and interest charges?
  4. What is the profitability during the quarter?

Besides some companies give an overview of what they expect from the upcoming quarters. This forecast is called the ‘corporate guidance’.

Invariably every quarter the first blue chip company to make the quarterly announcement is Infosys Limited. They also give out guidance regularly. Market participants keenly follow what Infosys has to say in terms of guidance as it has an overall impact on the markets.

The table below gives you an overview of the earning season in India:

Sl No Months Quarter Result Announcement
01 April to June Quarter 1 (Q1) 1st week of July
02 July to September Quarter 2 (Q2) 1st week of Oct
03 October to December Quarter 3 (Q3) 1st Week of Jan
04 January to March Quarter 4 (Q4) 1st Week of April

Every quarter when the company declares their earnings, the market participants match the earnings with their own expectation of how much the company should have earned. The market participant’s expectation is called the ‘street expectation’.

The stock price will react positively if the company’s earnings are better than the street expectation. On a similar logic, the stock price will react negatively if the actual numbers are below the street expectation.

If the street expectation and actual numbers match, more often than not the stock price tends to trade flat with a negative bias. This is mainly owing to fact that the company could not give any positive surprises.


Key takeaways from this chapter

  1. Markets and individual stocks react to events. Market participants should equip themselves to understand and decipher these events
  2. Monetary policy is one of the most important economic event. During the monetary policy, review actions on repo, reverse repo, CRR etc are initiated
  3. Interest rates and inflation are related. Increasing interest rates curbs inflation and vice versa
  4. Inflation data is released every month by MOSPI. As a consumer, CPI inflation data is what you need to track
  5. IIP measures the industrial production activity. Increase in IIP cheers the markets and lower IIP disappoints the market
  6. PMI is a survey based business sentiment indicator. The PMI number oscillates around the 50 mark. Above 50 is good news to markets and PMI below 50 is not.
  7. The Budget is an important market event where policy announcements and reform initiatives are taken. Markets and stocks react strongly to budget announcements
  8. Corporate earnings are reported every quarter. Stocks react mainly due to the variance in actual number versus the street’s expectation.

124 comments

  1. kamaleshnair says:

    1. From the close of a quarter/financial year, what are the time limits within which companies must declare the results?
    2. In case of insider trading (SAST), what is the time limit to inform the exchanges about it ?
    3. Is there any rule/law making it mandatory for companies to report events with financial significance?

    • Karthik Rangappa says:

      Answers in the same order –

      1) If I’m not wrong companies must declare results within 30 days
      2) In order to make it a level playing field SEBI mandates the companies to disclose insider trading ‘at the earliest’, which pretty much means the company has to declare this information within the same trading day
      3) Yes companies have to declare this information.

  2. ANANT says:

    By 8% & 7% in Repo and Reverse repo rate, do you mean it is same as we borrow from banks at 11 % ?

  3. Simranjeet says:

    Sir, i am not able to understand “Purchasing managers index(PMI)”

    • Karthik Rangappa says:

      PMI or the Purchasing Manager’s Index is an index which measures the activity of a purchasing manager (PM) of a company. This is measured by running a survey across many PM’s across sectors and industries. If the PM is sheen to be purchasing things for the company then the perception of growth and industrial activity is created, which is good for the markets. Else its considered not so good.

  4. Simranjeet says:

    Thank you sir

  5. shinde N D says:

    Important & better for new trader

  6. Ankush Agrawal says:

    Where Can one collect data of Street Expectation ?

    • Karthik Rangappa says:

      Unfortunately street expectations are not published by anyone…or at least I’m not aware of anyone doing this.

  7. Sumeet says:

    Every bank is mandatorily required to maintain funds with RBI.
    1. What does maintaing funds with RBI really mean?
    2. How CRR plays a role in this?

  8. Vivek says:

    Dear karthik
    Could you please explain the anamolous behaviour of CNX Nifty and Bank Nifty w.r.t the Bank rate cuts by the RBI on 15th March and 2nd June. Ideally the above mentioned indices should have zoomed up but the opposite happened. Meanwhile after the rate cut on 15th January, the market rocketed as expected. I’m still unsure about this behaviour.

    • Karthik Rangappa says:

      Well, this is because the market is forward looking, and it always factors in the news especially such as rate cuts.

      • Vivek says:

        So, going along with the speculations of a rate cut on 29th September, the market would have already discounted the same. From a 15.7 level on 7th Sep to 17.2 level on 24th Sep, one should expect the market to fall even after a rate cut on 29th Sep?
        In simple terms my query is how to know if the market has already factored the expectation or not?

        Thanks in advance

        • Vivek says:

          * Above data was for Bank NIfty Index

        • Karthik Rangappa says:

          Yes, my sense is that the market has factored in a rate cut…but if the rates do get slashed by anything more than 25bps, I think markets can rally.

          • Vivek says:

            1) But in the longer run the rate cut is good for Bank and industries as such. So is it profit booking which drags the CNX Nifty and Bank Nifty down after such announcement?
            2) Would it be prudent to bet on PUT options in this scenario or Straddle strategy is better here?
            3) For any of the above is CNX nifty better or Bank Nifty for options trading?
            Thanks in advance and my gratitude towards you for clarifying such doubts. You are like a messiah for me for having cleared such doubts in my mind 🙂

          • Karthik Rangappa says:

            My answers as below –

            1) Yes, the movement can be attributed to profit booking. But then do remember if RBI’s action is beyond the street’s expectation then the reaction could be far severe. For example everyone now expects a cut (if at all it happens) of about 25bps…but if RBI cuts it by 50 bps or does increases the rate (as opposed to general expectation) then the markets may react quite severely

            2) Buying Put options or call options could be a dangerous idea – suggest you read about volatility in the options chapter

            3) Nifty has a better liquidity hence my preference to trade Nifty

  9. Vivek says:

    Extension to the above questions
    4) The market dragged itself today at EOD. Does this imply anything as to if RBI does cut the rate tomorrow the markets shall improve or the downtrend shall continue as the market has already factored in the rate cut?

  10. Vivek says:

    Hi Karthik
    Market rallied yesterday coz of ECB reforms. And yesterday night news came up that China has cut the rates which led to zooming up of US markets and erasing off the losses of 2015. My questions:
    1) Did the US market shoot up as China would again be a lucrative destination for investment plus demand of US tech products would rise?
    2) How will this impact Indian market as now India would be losing on the edge it had against China? Overall sentiment of global market is good so I guess Indian market should also rally. But Noting that China is a rival leads me to think that Indian market would be bearish.

    I am basically trying to understand the dynamics of global market before I start trading.
    Also, during intraday TA of CNX Nifty I seldom find any conclusive results. e.g. lot of Marubuzos and Dojis are visible but the next candle comes out to be against what should have come based on the TA.

    And once again thanks for your time and inputs for I know no one else who could sort out these doubts of mine.

    • Karthik Rangappa says:

      Vivek – honestly very few people with access to right information understand China. Its a difficult economy to understand. I believe the economic dynamics of India and China are very different..with India is a better position. Of course this is just my personal view.

      I would suggest you start with overnight trades (swing trades) before you get into intraday.

      • Keshav says:

        What is an overnight trade? Aren’t trades restricted to the time when markets are open?

        • Karthik Rangappa says:

          Its just a terminology used to convey the fact that you have on open position in the market which you are carrying forward. Example : Monday I buy Nifty futures and sell the same on Wednesday, then it means to say I carried the position overnight (for 2 nights).

  11. Sumit says:

    Where can we get these event calendar? like RBI policy announcements dates etc at one place? do zerodha have any tool for this?

  12. suresh.ks says:

    Hi, sir,
    Any other events impact on Indian stock market apart from IIp,WPI,CPI,PMI,BUDGET,CORPORATE EARNING ANNOUNCEMENT

    Is there any impact from Crude Oil price,any other currency like USD,EURO?
    and please share if there any link to get these information

  13. suresh.ks says:

    Hi, sir
    Please share if there any web link to get informations about CPI,PMI,IIP?

  14. suresh.ks says:

    Hi,sir
    How to impact on Indian stock market from other country’s economy like China,USA,Germany
    which country is more impact on our stock market and why please share with details

    • Karthik Rangappa says:

      Suresh – this is a macro economic view and I’m afraid this cant be explained as a comment. However in a nutshell, US is probably a very important country for us.

  15. suresh.ks says:

    Hi, sir
    any reason for declining nifty? For how long will it go down ?

    • Karthik Rangappa says:

      Decline is mainly due to the situation in Chinese markets. How low will it go? Well, your guess is as good as mine 🙂

  16. suresh.ks says:

    Hi, sir
    any official link to get informations about stocks’ result,split,bonus, right issues?

  17. Shafeeq says:

    Hi.
    Does Inflation keeps compounding every year or Can we treat Inflation in same terms as of Simple Interest ?
    Thanks

  18. Tanmay says:

    I liked how you have lucidly explained the concepts but there are no examples, as you would provide in the options module. Please include a section where some case studies are discussed around the corporate events, the more the merrier.

  19. Sai Sreedhar says:

    Why does the stock price/Index keep moving up/down while the market is closed? I have seen sometimes after 3:30PM the market still keeps moving and the closing price at 4:00PM is different (sometimes it happens until 5:30PM), or sometimes the opening price itself is higher or lesser before 9:15AM, though no trades have happened yet.

  20. Tanya says:

    Sir,
    Why is every company’s face value Rs. 10? Which one among the face value and market value is included in the accounts(financial statement) of a company?

  21. Rajiv says:

    Hi Sir, thanks for the great article. Just an observation – You have stated “The RBI meets every quarter to review the rates.”. I think now it is once every two months and not once every quarter. Please correct if I am right. Thanks.

  22. sudheer says:

    considering that during budget time the market will be very volatile,why cant the exchanges be closed for few days , so that investors can take time to digest the news after the news is cooled off and there would be no panic selling?Just a thought..

  23. Ayush says:

    How the inflation will affect stock price and investors money?

    • Karthik Rangappa says:

      High inflation leads to higher interested rates, which means tighter supply of money, which means businesses cannot borrow money easily, which means lesser business growth, which means stock prices will not go up, which means investors will not make enough money.

  24. Sameer Desai says:

    Hi Karthik,
    Why would RBI borrows money from other banks..?
    And it is mentioned that, when banks choose to lend money to the RBI instead of the corporate entity, the supply of money in the banking system reduces. Is it not true when the banks lend money to the corporate entities..? or is it that the RBI borrows huge amount than the corporate entities which causes reduction in the supply by other banks?
    And great initiative by Zerodha..You guys Rock..!!!!
    Thanks in advance

    • Karthik Rangappa says:

      RBI itself is a bank and it deals only with other banks. So if a bank has excess funds, then it can part that with RBI and earn an interest.

  25. Harif says:

    What are the key factors to watch during Quarterly results(EBITDA etc.,). For example – Lets take Infosys, After results, How/when do we conclude whether the stock will raise or fall?

    • Karthik Rangappa says:

      For Infy and other IT companies look for guidance for the coming quarters along with Revenue, EBITDA, and PAT (along with its growth and margins). The stock will raise or fall based on the results.

  26. Pratap Reddy says:

    I thank you Zerodha Team.
    I am holding 600 shares of Aurobindo Pharma as on today.
    The following is self explanatory from the company:
    “Aurobindo Pharma Ltd has informed BSE that a Meeting of the Board of Directors of the Company will be held on May 29, 2017, inter alia, to consider and approve, the Audited Financial Results of the Company for the year ended March 31, 2017 and also to consider dividend, if any, for the financial year 2016-17.

    Further to the letter dated May 12, 2017 informing the closure of Trading Window of the Company from May 18, 2017 until 48 hours from the date of declaration of the Audited Financial Results of the Company for the year ended March 31, 2017, Company inform that trading window will be closed up to May 31, 2017 and shall be re-opened on June 01, 2017.”
    Now my situation is, if I sell, there will be loss of 20% as per the present market.
    Pls advise what to do. I will be obliged.

    • Karthik Rangappa says:

      The trading window closure is applicable only to the insiders of the company. Not applicable to regular shareholders.

      • Pratap Reddy says:

        Thank you for the prompt reply.
        They are mentioning “to consider divident”, what does it mean ?
        Regular traders do get any benefit from it ?
        Pls clarify.

  27. jyotshna says:

    Hi,
    What are the impacts of elections ?
    1.) India Loksabha election
    2. ) Particular states vidhan sabha election.
    3.) Election of different countries ( say USA, UK, Germany etc ).

    After election result how it moves ( I have seen different party wins election then also market reacts heavily, it’s not related to 1 party ) EX : Delhi AAP won market zoomed, Bihar Nitish Won market zoomed, Maharastra BJP won Market zoomed, Punjab congress won market zoomed.( Expectations were different and results different then also +ve reaction ) Why ? Please answer

  28. Deepak says:

    Where Is CPI inflation data available.?
    Can someone please post the link. I found 2012 data in gov. webpage –> Ministry of Statistics and Programme implementation

  29. Ashutosh tilwankar says:

    Hello,
    Sir you said companies issue corporate guidance…where can we find these..??

    Thank you!

    • Karthik Rangappa says:

      Not all companies do, but if they do, you can find that in the investor conference transcripts, which will be made available on the company’s website under the investor’s section.

  30. abhishek kumar sah says:

    1) When the stock split is announced, that day the stock chart shows a gap down. But the next day somehow the price is adjusted. how??

    2) If you look at the chat of OIL fut (date-1-12-2017) there is a big gap, due to stock split. But the chart for the same in spot market does not have any gap?

  31. abhishek kumar sah says:

    same is the case with reliance. there is a big gap in the futures chart but the spot chart does not show any gap.(date-9-6-2017)

    Also the spot price is some how adjusted.
    Please explain?

    • Karthik Rangappa says:

      Ah, are you looking at the continuous charts? If not, click on the continuous option in the chart ‘Display’ menu.

      • abhishek kumar sah says:

        Yes i am looking at the continuous data chart for the Reliance nov fut. On (6-9-2017) the price is around Rs 1600 but on the next day(7-9-2017) the price is near Rs 800(displaying a big gap). And this(futures) chart is not adjusted.

        but the spot chart for the same date is adjusted and it shows a continuous chart.

  32. abhishek kumar sah says:

    Is there anything i should keep in our mind or anything i should be cautious about if lets say i hold a futures contract and there is a stock split announced?

  33. Vidyadhar Belvalkar says:

    how to identify whether a particular speculative announcement is already discounted or not in the price of index/stock before such announcement is made.e.g reduction in RR, RRR etc

    • Karthik Rangappa says:

      Usually, you can observe a rapid increase/decrease in price leading to the event/news – this is indicative of the price discounting the news.

  34. arvind says:

    Karthik Sir

    how do stock prices of fundamentally sound companies ( eg. tcs , reliance , hul etc) react during a market crash ( eg. 2008 ) ? do they crash/fall very fast too like rest of market (say for example 20 % on a single day) or correct slowly over a longer period of time ( eg. 2-3 % in a day ) ?

    what are other things that happen only during crash ?

    thanks 🙂

  35. Aashish Rana says:

    Sir
    How do I check the charts of CPI,WPI. Though I checked on mospi, I can found only PDF and it is very difficult to extract information from there. And please do tell me about CRR,Repo rate,Reserve Repo rate charts too.

  36. Siddharth says:

    Sir,
    is there a way to know which companies have contributed via data to PMI or IIP sector index ?
    Since Indian economy has major share Unincorporated companies

  37. Mangesh Baxi says:

    Is PMI a subjective index or it is determined by quantified parameters ? If then how do they assure its accuracy & remove bias(if any)?

    • Karthik Rangappa says:

      The nature of the index is to capture the opinion of the purchasing managers, Mangesh. So there is bound to be some amount of bias here.

  38. Rabindra says:

    Hello Kartik,
    Other economic factors that have significant impacts on any stock market would be: money supply, trade deficit, FII, crude price and gold price. Could you dwell on these topics from the indian PoV while updating this page. would love to know how exactly they affect the indian market.
    Thanks.

    • Karthik Rangappa says:

      of course, these factors matter too. I’ve just tried to summaries a handful of events with maximum impact. Will try and include these events as well 🙂

  39. ganesh natarajan says:

    I could see the quarterly resume is more than estimation and less than market estimation. Where I can find the estimation/expectation ?

  40. Vivek singh says:

    Karthik sir.,i am a beginner. U have written in such a lucid and easy to grasp form unlike other contents online… Thank u so much…prior to this I don’t know even a single topic of stock market and indices… Now I am learning a lot… It’s cool…

  41. Anulekh says:

    Is Repo Rate the most important outcome of rbi monetary policy which is monitored by market

  42. Ashwani Kumar Rai says:

    sir
    How we can check
    for a stock how many times a stock split had occured in history .

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