The economy is the study of the production of goods and their consumption. This subject also studies the various services that are involved in the production as well as consumption of goods. The economy is a subject that can be divided into two major branches: Microeconomics and Macroeconomics.
Microeconomics is a branch of economics that mainly focuses on smaller entities like a firm or an individual. It also deals with the shifting prices that occur due to the changing patterns of supply and demand. Besides this, Microeconomics is also concerned with the production, consumption, pricing of products, and economic welfare.
Whereas, Macroeconomics is quite different from microeconomics as it works on a larger level. In this article, we will learn more about Macroeconomics and the way it impacts the capital market. To comprehend this concept more vividly one may also opt for an excellent financial accounting and analysis course.
What is Macroeconomics?
Macroeconomics is that branch of the economy that deals with external factors. It is mainly concerned with the economy at the national and international levels. Therefore, Macroeconomics does not deal with individual customers or companies.
Its main purpose is to study various economic events like unemployment, inflation, monetary policy, fiscal rate, economic growth, GDP, national income, poverty, etc. It is also concerned about the rate of oil prices as well as gold prices. Big ventures use Macroeconomics to set financial plans in a global domain to yield more profits.
The concept of Macroeconomics was invented around the 1700s when concepts like unemployment, trade, etc became popular. It was only during the 1940s that Macroeconomics was established as a subject and gained immense popularity.
What do you mean by Macroeconomic Factors?
Macroeconomic factors are those phenomena that can hamper the global economy or the economy of a country. This affects either the entire population that is residing on this planet or may effet the nationals of the impacted country. There are various existing macroeconomic factors like inflation, GDP, growth rate, etc.
Various Impacts of Macroeconomic Factors on Capital Markets
Macroeconomics is extremely important for capital markets. One can easily understand the various trends in the capital market with the assistance of macroeconomics. Therefore macroeconomic facts have a direct impact on the capital markets.
Here are some of the macroeconomic factors that have an impact on the capital markets:
Gross Domestic Product (GDP)
Gross domestic product or GDP is an important factor that has a direct impact on the capital markets. It is the final market value of the product that a country had produced in a year. The economic condition of a country is determined by its GDP.
If the GDP of a country is high then the country is considered to be well-performing. On the other hand, if it is low then the economy of the country is not performing well. So if the GDP of a country is low then its will also adversely affect the value of the stocks.
However, GDP is not constant and can change. When a GDP increases then the value of the stocks also rejuvenates. Therefore, investors always track the GDP of various countries to predict the value of stocks.
The GDP of India in 2006 was 8% and was performing well. However, in 2008 it rapidly fell down to 3%. Therefore, the NIFTY 50 index crashed down from 5,500 levels to 2,800 levels in 2008.
Rate of Interest
The rate of Interest is another macroeconomic factor that influences the capital markets. The interest rates are decided by the central bank of the country according to their economic situation. During the time of inflation, the rates are on the higher end while at the time of recession, the rates are reduced.
Fluctuating rate of interest also hampers the capital flow of the stock market. Investors tend to invest in stocks when the rate of interest is low to receive more returns. However, when the rate of interest is quite high investors opt for bonds over stocks because the level of risk is low there.
During the Covid-19 pandemic, the interest rates were reduced to 4%. However, the interest rate is 6.5%.
Inflation is the period when the prices of goods increase rapidly. This phenomenon takes place when a country is economically performing well. It is just the opposite of a recession.
Inflation had both positive and negative impacts on the stock market. Cyclical stocks perform well when inflation is high. However, stocks of manufacturing companies perform negatively during high inflation. This is because the prices of raw material increases and adversely affect the profit margin of the company.
Crude oil is another macroeconomic factor that affects the stock market of India. It is one of the largest importers of crude oil. Therefore, when there is a hike in the price of crude oil many industries suffer.
This has a direct impact on the capital market. The stocks of those industries that are solely dependent on oil perform adversely when there is a price hike. Industries like airlines, refineries, lubricants, etc. get affected.
The dollar index is one of those factors which directly affects the performance of stocks. When the dollar index increases the value of the stocks falls down immediately. The stocks of the banking sector, government sector, automobile sector, etc. are adversely affected when the dollar index increases. This inverse relationship of NIFTY 50 and USD is continuing for the last 20 years.
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