Library / MiyeeStockBuddy: The Complete Guide to Indian Markets

Part 2. The Tide Under Every Boat: Macroeconomics

You can pick a wonderful company and still lose money for two years, because the whole market was falling. Roughly half of what happens to any given share is the market, the sector and the economy, and only the rest is the company itself. These are the forces that move everything at once.

2.1 Inflation: Your Money Quietly Shrinking

Inflation is the rate at which prices in general rise. If inflation is six percent, the hundred rupee note in your pocket buys ninety four rupees worth of goods a year from now, without you spending a paisa. India measures it mainly through the Consumer Price Index, which is published monthly and which the Reserve Bank of India is legally required to keep near four percent, with a tolerance band of two percent either side.

Think of it like this

Inflation is a slow leak in a bucket. You are not spending the water, but there is less of it every morning. This is why leaving all your savings in a cupboard, or in a savings account paying three percent while inflation runs at six, is not "safe". It is a guaranteed slow loss, just one that never produces a statement showing red.

Shares are one of the few assets that can outrun inflation over long periods, because companies raise their own prices too. A cement company selling a bag for four hundred rupees this year sells it for four hundred and thirty next year, and its profits grow in rupee terms along with everything else. That is the underlying reason equity has beaten fixed deposits over most twenty year windows in India.

2.2 The RBI Repo Rate: The Price of Money

The Reserve Bank of India lends money to commercial banks, and the interest rate on that lending is called the repo rate. It is the single most important number in Indian finance, because every other rate is priced off it. Here is the chain of effects, and it is worth learning by heart.

1. The repo rate rises, so banks pay more for the money they use.

2. Banks charge more on home loans, car loans and business loans.

3. Companies borrow less, so they build fewer factories and hire more slowly.

4. Future company profits are therefore expected to be smaller, so investors will pay less for the shares today.

5. At the same time fixed deposits and bonds now pay more, so some money leaves shares entirely and moves there.

The result: rising rates usually push share prices down and falling rates usually push them up, regardless of how good the individual company is. This is also why a rate decision that surprises the market moves the index within seconds, before any human has read the statement.

Think of it like this

The repo rate is the thermostat of the economy. Turn it up and the room cools: activity slows, borrowing gets expensive, and the most speculative bets are abandoned first. Turn it down and the room warms: cheap money flows into property, business expansion and shares, and the most speculative bets come back first.

Who feels it most

Hurt most by rising rates: companies carrying heavy debt, real estate developers, and anything customers buy on loans, such as cars, homes and consumer durables. A highly indebted company pays more interest, and less is left for shareholders.

Helped by rising rates: banks and lenders often earn a wider gap between what they pay depositors and what they charge borrowers, at least for a while.

Barely affected: companies with no debt selling something people buy regardless, such as soap, biscuits and electricity.

2.3 Crude Oil: India Imports Most of What It Burns

India buys the large majority of its crude oil from abroad and pays for it in US dollars. That makes the crude price a direct input into the Indian economy rather than a distant headline.

Crude rises, so India’s import bill rises and more rupees must be sold to buy dollars, which weakens the rupee.
A weaker rupee makes every other import dearer, which pushes inflation up, which pressures the RBI to raise rates.
Transport and packaging costs rise for almost every company, squeezing profit margins across the board.

Some businesses feel it immediately. Paint companies use crude derivatives as raw material. Tyre makers use carbon black. Airlines buy jet fuel, which is their single largest cost, and a sustained rise in crude has bankrupted airlines in India before. When crude spikes, look at those first.

Reliance Industries is the instructive exception. It refines crude, so parts of its business can benefit when refining margins widen. This is why "oil is up so the market falls" is too blunt a rule to trade on, and why the sector matters more than the index.

2.4 The Rupee and the Dollar

The exchange rate is a price like any other, set by how many people want rupees against how many want dollars. It matters to your portfolio in two opposite ways at once.

A weaker rupee	Helps	Hurts
Rupee falls from 83 to 87 per dollar	Exporters: IT services, pharmaceutical exporters, textiles. They earn dollars and pay costs in rupees, so the same contract is worth more.	Importers: oil refiners, electronics assemblers, anyone with dollar borrowings, and every Indian buying an imported good.

This is also why foreign investors watch the rupee closely. A foreign fund that earns ten percent in Indian shares while the rupee falls six percent has earned four percent in its own currency. When the rupee is falling steadily, foreign selling often follows, which pushes the market down, which weakens the rupee further. That loop is worth recognising when you see it.

2.5 Global Events: Why Your Morning Starts in New York

Large international investors move money between countries looking for the best return for the risk taken. When the American central bank raises rates, US government bonds start paying more for almost no risk. Some of the money invested in emerging markets like India then goes home.

Think of it like this

Imagine a landlord with flats in two cities. When rents in the safer city rise sharply, he sells a flat in the riskier city to buy there instead. He may have nothing against the riskier city, and the tenants may be excellent. The arithmetic simply changed.

When foreign investors sell in bulk, the Nifty falls even if Indian companies are doing perfectly well that quarter. Understanding this saves you from concluding that something is wrong with a company when nothing is.

Wall Street closes late at night Indian time. By the time you wake, the GIFT Nifty, which is an Indian index traded outside normal Indian hours, has usually already reacted, which is why it is a reasonable early hint of how our market will open.

2.6 The Economic Calendar Worth Keeping

You do not need to follow everything. Six releases explain most of the surprise moves in an average year.

Release	When	Why it moves the market
RBI monetary policy	Roughly every two months	The repo rate and the tone of the commentary
CPI inflation	Monthly, around the twelfth	Decides what the RBI will do next
Quarterly company results	Four seasons a year	The only hard data on whether profits are actually growing
Union Budget	First of February	Tax rules, capital spending, sector by sector winners and losers
US Federal Reserve decision	Eight times a year	Sets the global cost of money and therefore foreign flows
GDP growth	Quarterly	Confirms or contradicts what the market already assumed
The thing nobody tells beginners The market does not react to whether the news is good. It reacts to whether the news is better or worse than what was already expected. A company can report record profits and fall eight percent because analysts expected slightly more. This is the single most confusing thing for a new investor, and it is the whole game in one sentence: the expectation is already in the price, and only the surprise is new information.