The Impact of Economic Indicators on Stock Market Movements

The forces of macro economic factors impact the performance of all companies and their stock prices. When the demand for a particular stock rises, so does the stock’s price. Conversely, a dip in the demand for a particular stock (or a rise in its supply) leads to its fall in prices. Just like demand and supply, the stock market is also influenced by various macroeconomic factors. Investors need to be mindful of these aspects because they can lead to substantial price swings.

Let us decode how macroeconomic factors influence the stock market.

The Role of Macroeconomic Factors in the Stock Market 

Broad economic indicators and policies impact different market sectors and companies in different ways. Let us take a closer look at how various macroeconomic factors affect the stock market.

• Repo Rates

The repo rate reflects the rate at which commercial banks borrow money from the Reserve Bank of India (RBI). Higher repo rates make borrowing more expensive, thus reducing corporate profits and stock prices. Falling repo rates have the opposite effect.

Unchanged rates can also impact the market. For instance, earlier in June 2024, the Sensex and Nifty surged more than 2% when the repo rate remained unchanged at 6.5%.

The Reserve Bank of India publishes repo rate data online.

• Inflation 

High inflation increases production costs and potentially reduces profit margins and stock prices. Conversely, low inflation rates can have the opposite effect, potentially leading to higher stock prices. For instance, retail inflation hit a 1-year low of 4.75% in May 2024. This, in turn, led to fresh highs for the Nifty and Sensex.

The Consumer Price Index (CPI) can help you measure the inflation in the economy. The Ministry of Statistics and Programme Implementation (MOSPI) publishes the Consumer Price Index online for each month.

• Gross Domestic Product (GDP)

The GDP measures the total value of all the services and goods produced in the economy. A favourable GDP outlook can benefit the stock market as companies tend to perform well in a growing economy. For instance, both the benchmark indices in India rose by almost 2% in March 2024 following the release of GDP growth data that surpassed expectations.

The Ministry of Statistics and Programme Implementation publishes the Gross Domestic Product data online.

• Foreign Direct Investment (FDI) 

Foreign Direct Investment (FDI) represents the investments made by foreign entities in Indian businesses. High FDI inflows generally indicate increased confidence in the country’s economic growth prospects and influence the stock market positively.

The Department for Promotion of Industry and Internal Trade (DPIIT) publishes the total FDI inflows for every quarter.

• Index of Industrial Production (IIP) 

The Index of Industrial Production (IIP) provides insights into the growth and production trends in the manufacturing, electricity and mining industries. An increasing IIP indicates strong industrial activity, which may lead to increased corporate earnings and consequently higher stock prices.

The Ministry of Statistics and Programme Implementation (MOSPI) publishes the Index of Industrial Production every month.

• Exports and Imports 

Strong export figures may enhance investor confidence and boost the Balance of Trade (BOT), both of which may cause stock prices to rise. However, increasing imports may have the opposite effect.

The Ministry of Commerce and Industry publishes the import and export data and balance of trade figures each month.

• Index of Eight Core Industries 

The Index of Eight Core Industries (ICI) measures the individual and combined performance of eight key industries — natural gas, steel, electricity, cement, crude oil, refinery products, coal and fertilisers. Strong growth in these eight core industries can increase investor confidence, leading to rising stock prices.

The index is published each month via a press release, available on the official website of the Office of the Economic Adviser.

• High-Frequency Indicators (HFIs)

The following HFIs can also give you insights into the broad economic condition of the country and affect the stock market indirectly.

• Infrastructure Development:

Rapid infrastructure development is an indicator of strong economic growth and can have a favourable impact on the stock market. You can find infrastructure-related data on the official portal of the Government of India and the Ministry of Statistics and Programme Implementation.

• Power Consumption:

Power consumption data is typically directly proportional to the level of industrial activity in the economy. The Grid Controller of India Limited publishes power consumption-related information online.

• Goods and Services Tax (GST) Collection:

High monthly GST collection figures indicate robust economic activity and increased consumer spending, which can lead to optimistic stock market sentiment. You can find the GST revenue collection figures on the website of the Goods and Services Tax Council.

• Rail Freight and Port Cargo Traffic:

Rail freight and port cargo traffic information provides insights into the movement of goods within and outside the country. Increased freight and cargo traffic signifies robust economic growth. Port cargo traffic information is published online by the Ministry of Ports, Shipping and Waterways.

• Volume of E-Way Bills:

High volumes of E-Way bills indicate increased inter-state movement of goods, which is usually a good sign for the economy. You can find E-Way bill information on the Goods and Services Tax E-Way Bill System portal and on the website of CEIC.

• Government Policies:

Government policies and regulations also influence the stock market in several ways. You can find information about the latest regulations in news portals and government press releases.

Conclusion

The bottom line is that macroeconomic factors play a pivotal role in the stock market. Investors and traders need to consider these aspects and make holistic decisions that do not eliminate any key influencers. Overlooking the influence of macroeconomic data on stock prices may lead to potentially high losses if you are not careful.