GOVERNMENT ACTIONS
What do you think, how the actions that are taken by the government, like, the actions taken by the Reserve Bank of India (RBI), or the budget that is launched, or when any bill is passed, affects the company or the development of the country. In the last blog of Vyolvepaisa we discussed what are Corporate Actions, why are corporate actions are taken or what is the significance of corporate actions in the stock market. So today we will talk about the significance of government actions in the stock market.
So without wasting much time, let’s get started!
We have heard that if the country is in the hands of a bad government then the growth of the economy declines or rather shatters, country’s development slows down, so what do you think, what really we mean by no development? The question here arises is that, what are the factors on which the growth of the country depends? Obviously company. If there would be no companies in India, then where will the people work and if they don’t work how will they earn for their living. So if someone says India’s growth is not increasing that means the growth of the companies and businesses in India are not increasing.
If you recall, In the first blog of Vyolve Paisa we discussed ‘Why Investment’. In that blog we discussed why one should have knowledge of business because it doesn’t matter how much you try to ignore the things by thinking that you’re from an engineering background or from the medical background, it’s your money and you should know about your money and you should know how does a business works. Now let’s talk about some of the Government Actions.
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” — John Maynard Keynes
The first one can be termed as Monetary Policies. You must have heard this term before. Monetary policies are the tools by which the RBI controls the supply of money. Let’s understand this with the help of an example, let’s take two states and consider one of the state to be rich and the other state to be the not-so-rich one. Then the food in the rich state will also be costly, say in Mumbai, Bangalore. And at not-so-rich states, the food and living will be comparatively cheap. So why did this happen? The same country (India) but why the cost is different? Because people living in Mumbai or Bangalore are having more money as compared to the other not-so-rich states and more money leads to Inflation. So monetary policy states that how the RBI puts up a streamline between different rates in order to fight inflation while ensuring that country’s development is not affected.
Now Inflation is something we hear a lot about. The supply of money is controlled by using Interest Rates. Now, what is Interest Rate? Many a times banks require money or funds and they borrow the money from the RBI and when it is being borrowed, then the interest rate is charged. The rate at which the RBI lends money to the banks is called Repo Rate. Now, say the Repo Rate is quite high, i.e. if RBI charges more interest rates from the banks, then the bank would run short of money and eventually the growth of the company would hamper, which will also lead to slower economic growth.
Now next rate is when RBI borrows money from the banks, the rate at which the RBI borrows loans from the banks is called Reverse Repo Rate. Now when this rate is high, then whom will the bank prioritize for giving the loan, to the business, the company, or the RBI. Well it’s obvious that the RBI will never fail in returning back the money, but you cannot predict the same about a company. So the rates of interest are controlled in such a way that any of the rates would not be much high, otherwise, the bank would say that they would only keep their money aside for RBI, and if the banks would not help the companies in providing funds, then this will turn out as a trouble for the growing companies. And by managing the Repo Rate and Reverse Repo Rate, the RBI decides the rates, which controls the inflation.
Inflation simply means the rise in the prices of goods and services. The stuff that you used to purchase ago at Rs.10, now costs Rs.100. Now how do you measure inflation? Say a student qualified a particular exam or not, how do you identify that? For that, we would look at the grades, the passing marks. The same way, inflation is measured by using two Indices, Wholesale Price Index and Consumer Price Index. These two indicies are used to compare the inflation rates of the particular year with the previous year.
Now who determines the Consumer Price Index (CPI), might be someone publishing, right? So CPI is published by Ministry Of Statistics and Program Implementation of India (MOSPI). MOSPI presents a chart around the second week of every month, which reports how the CPI inflation is working.
Next comes Industrial Production which shows how an industry performs which also has its own index, and this index is called Index of Industrial Production (IIP). IIP indicates how the industrial sector is performing. IIP in COVID-19 is certainly less, probably the lowest in last 10–20 years. Now, who publishes IIP? Well, IIP is also published by MOSPI.
Now Budget, we already discussed what a budget is. Say a budget is launched and the government brought some packages for the travelling sector, then the travel agency will perform much better. So the people related with the transportation industry, or the people who invested in the travelling sector will get much profits.
Next one is Corporate Earning Announcement (CEA) which happens four times a year. You might not have heard of CEA, but might have heard of Quarter Result, that a particular company has released Quarter Result. This shows how the company is actually performing. Say when I am working in a company and the company CEA results are degrading continuously from the last 2–3 years, then I can make out that the progress of the company is not so good and it may happen that the company may lay off many of its employees, thus if employees know about this situation beforehand then they can prepare themselves for the worse outcome. Each result tells about the performance of the company. So these were the indices.
So that’s all form Vyolve Paisa for today. Stay tuned for the upcoming Financial Concepts.
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