Macro & Economy

Eight ideas that explain most of the days when the market moved and nothing company-specific happened.

Inflation sets rates, and rates set everything else

The chain runs in one direction and it is worth being able to recite it. Inflation — measured in India by CPI, with WPI as the wholesale counterpart — is what the Reserve Bank is mandated to control, within a target band. When inflation runs hot, the RBI raises the repo rate, the rate at which it lends to banks. That raises the cost of money everywhere.

Higher rates hurt equities through two separate channels. Borrowing costs rise, which compresses corporate profits, and the discount rate applied to future earnings rises, which mathematically reduces what any stream of future profits is worth today. The second effect falls hardest on companies whose value is mostly in growth expected years out, which is why rate-sensitive and high-growth sectors sell off first when the rate outlook shifts.

This is also why markets react to the inflation print rather than to the rate decision. By the time the RBI acts, the data that forced its hand has been public for weeks.

Bonds tell you what the market believes

Bond yields move inversely to bond prices, and the 10-year government security yield is the reference rate the rest of Indian finance is priced against. Rising yields mean money is getting more expensive and is usually a headwind for equities.

The yield curve — yields plotted across maturities — is the bond market's forecast written down. Normally it slopes upward, because lending for longer deserves more compensation. When it flattens or inverts, the market is saying it expects rates to be lower in future, which usually means it expects growth to be weaker. It is a slow signal and an imprecise one, and it is still among the more useful things to check that is not a stock price.

GDP growth is the underlying variable all of this is about, and it is the least tradeable of them because it is reported with a long lag and revised afterwards.

The two external variables India watches

Crude oil matters to India more than to most large economies, because most of it is imported. A sustained rise in crude widens the import bill, pressures the rupee, feeds into inflation and squeezes the margins of everything downstream of it. Paint companies, tyres, airlines and chemicals move on crude in a way that has nothing to do with their own results.

The rupee against the dollar is partly a consequence of the above and partly a driver of it. A weakening rupee helps exporters — IT and pharma earn in dollars — and hurts importers. It also affects foreign institutional flows directly: a foreign investor's return is the stock's return plus the currency move, so a falling rupee makes Indian equities less attractive to exactly the participants whose flows move the index most.

Monetary policy is the RBI's domain: rates and liquidity. Fiscal policy is the government's: taxation and spending, concentrated in the Union Budget each February, which is reliably one of the highest-volatility days of the Indian market year.

All 8 terms in Macro & Economy

Alphabetical, each with a worked example. Every one of these is searchable from the glossary index.

Bond Yields

The return on government bonds (e.g. the 10-year G-Sec). Rising yields raise the 'risk-free' bar and often pull money out of equities.

e.g. The 10-year G-Sec yield climbing from 7.0% to 7.4% makes safe bonds more attractive, pressuring richly-valued stocks.

Crude Oil

India imports most of its oil, so crude prices heavily influence inflation, the current-account deficit and sectors like paints, aviation and OMCs.

e.g. Brent spiking from $75 to $95 raises fuel and input costs — negative for airlines, paints and the rupee.

Currency (INR/USD)

The rupee-dollar rate. A weaker rupee helps exporters (IT, pharma) but raises import and oil costs and can trigger FII outflows.

e.g. USD/INR moving from ₹83 to ₹85 (weaker rupee) boosts IT exporters' earnings but makes imported oil pricier.

GDP

Gross Domestic Product — the total value of goods and services an economy produces. Its growth rate is the headline measure of economic health.

e.g. India's GDP growing 7% year-on-year signals a fast-expanding economy, generally supportive for corporate earnings.

Inflation (CPI/WPI)

The rate at which prices rise over time. India tracks CPI (retail) and WPI (wholesale). High inflation pushes the RBI to raise rates, which usually pressures stocks.

e.g. CPI printing at 6.5% (above the RBI's ~4% target) raises the odds of a rate hike — typically a headwind for equities.

Monetary vs Fiscal Policy

Monetary policy is the RBI managing money supply and rates. Fiscal policy is the government's taxing and spending (the Union Budget). Both steer growth and markets.

e.g. The RBI cutting rates (monetary) plus the Budget raising infra spending (fiscal) can together fuel a market rally.

Repo Rate

The rate at which the RBI lends to banks — its main policy lever. Cuts make money cheaper (bullish for equities); hikes cool the economy.

e.g. The RBI cuts the repo rate from 6.5% to 6.25% → cheaper loans; rate-sensitive banks, autos and realty often rally.

Yield Curve

A plot of bond yields across maturities. A normal curve slopes up; an inverted curve (short rates above long) has historically warned of recession.

e.g. The 2-year yield rising above the 10-year (an inversion) is a classic recession warning sign.

Definitions are written for people learning to read a market screen, not as legal or regulatory definitions, and nothing on this page is investment advice — see the disclaimer. Spotted something wrong or unclear? Tell us.