Central Banks often issue monetary policies also known as central bank policies. These policies are launched to boost the economic growth of a nation. The main goal of these policies is to maintain the price of goods, reduce the unemployment rate by generating new jobs, and build a well-established economy.
Most countries prioritise two things while creating their monetary policies. One is their internal economic as well as political issues and the other is the geopolitical situation. This helps them to deal with the uncertainty of the capital market.
The capital market is so volatile that it can be influenced by any new monetary policies and new geopolitical issues. Therefore, one must possess enough knowledge about the volatility of the capital market before commencing a career in financial services. In this article, we will discuss in detail the impact of central bank policies and geopolitics in capital markets.
What do you know about the Capital Market?
The capital market is a financial market that allows several traders and customers to trade closely. Stocks, bonds, funds, etc are bought and sold by the individuals who are associated with this market. The participants of this market can either be an individual or any organisation.
The investments which are executed in the capital market are long-term investments. There are two kinds of capital markets one is the primary market while the other is the secondary market. Bombay Stock Exchange(BSE) is one of the perfect examples of a secondary market.
How do Central Bank Policies influence the Capital Market?
There are several Central Banks in the world. It is the main bank of a country whose main job is to look after the financial condition of its nation. To achieve this banks launch various monetary plans that stabilise economic fluctuation which means fluctuation is under proper control.
The central banking policies can be broadly classified into three categories. The first one is the accommodative policy which is considered to be very expansionary and loose, while the second kind of policy is known as the restrictive policy which is usually tight and leads to a contradiction in the economy of a country. The last policy is the neutral policy which chooses the middle path.
These various kinds of policies have direct as well as indirect impacts on the capital market. It directly impacts the interest rates, commodities, cash, bonds, equities as well as funds. And it indirectly affects the future of inflation.
Here is how various monetary policies affect the capital market:
Accommodative Monetary Policy-
When a nation opts for the accommodative policy the value of the cash decreases. This is mainly because the interest drops down and this will minimalise the returns. However, the market real estate improves with this type of policy.
People can easily avail the mortgage loans at low interest as it is quite profitable. Along with real estate, equities, commodities as well as stocks also witness a sharp robust due to low interest. However, bonds and currencies tend to yield lower during this type of monetary policy.
Restrictive Monetary Policy-
This is a rigid or tight monetary policy. During this policy, there is rapid economic growth and a reduction in inflation. During the restrictive monetary policy, many assets in the capital market perform poorly.
As the interest rates increase during this phase bonds, equities, and real estate underperform. Therefore, it is quite expensive to buy equities and take a mortgage for real estate. However, cash and currencies tend to perform well during a restrictive monetary policy.
Cash and currencies tend to perform well because the interest rates increase. During the period between 2010 and 2013, Candana used a restrictive monetary policy that's why their currency was performing better than the USA.
How influential is Geopolitics in the Capital Market?
Geopolitics deals with political and social issues but at a global level. These issues include territorial disputes, water issues, military intervention, climatic change, disputes over natural resources, etc among various nations. Geopolitics is one of those mediums that can easily influence the capital market.
The experts at Federal Reserve had invented the way one can measure the impact of Geopolitical tension on the capital market. This method is known as Geopolitical Risk Index (GPR). The GPR method is quite useful as Geopolitical incidents are very unpredictable and have a direct effect on the global economy and finances.
Financial investors and traders are always intimidated by any new Geopolitical situation as it mostly affects the capital market negatively. The market returns are adversely affected. The biggest meltdown took place in the year 2008 that had negatively impacted the society and economy as many people failed to repay their loans.
Another situation took place during the Covid-19 pandemic. This pandemic had created great concern across the world and had an adverse impact on the financial market. As most of the ventures were forced to shut down due to the lockdown.
During calamities, diseases, and war the equity and finance market has to face downfall. However, Geopolitical issues are not permanent. Hence, after all the problems are sorted the companies which have a strong foundation will end up giving positive returns.
To learn more about the monetary policies and capital market one needs to opt for an excellent online course. Therefore, Imarticus Learning has launched the IIM Lucknow Financial Services And Capital Markets course. This course is beneficial for those who want to start a career in financial services.
This course of Imaticus Learning is a collaboration with IIM Lucknow so the best and most experienced faculty is going to lead this 6 months programme. So without any further delay get yourself enrolled in this online course to bag lucrative opportunities.