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6 Macroeconomic indicators – What are they, and how do they affect Investments

Let us get introduced to various macroeconomic indicators. In this article, we shall learn what these indicators distinctively are and how do they affect your Investment.
Macroeconomic Indicators

In the recent times, you must have seen various media headlines like: "Inflation is at multi-year highs", "RBI goes for off-cycle 40 basis points repo rate hike", and "April 2022 GST collections at an all-time high of Rs. 1.68 lakh crores", "Multiple agencies cut India's GDP growth forecasts for 2022", etc. You must be wondering what these macroeconomic indicators like inflation, interest rates, GST collections, GDP growth rate, etc., are and how they affect stock markets. Let us discuss them one by one.

1. Inflation

  • Inflation is the general increase in the prices of goods and services over time. Inflation can be measured monthly, yearly, etc. For example, if 1 KG of apples cost Rs. 100 last year, it costs Rs. 110 this year, then the 10% annual increase in price. In India, the inflation data is released by the Ministry of Statistics and Programme Implementation (MOSPI) and the National Statistical Office (NSO).
  • They release the All India Consumer Price Index (CPI), which measures the inflation rate (growth in prices). The CPI considers the price rise among various food, clothing, footwear, housing, fuel, and various groups.
  • The April 2022 CPI inflation rate was 7.79%. For March 2022, it was 6.95%, and last year (April 2021), it was 4.23%. So, as we can see, the inflation rate has increased year-on-year and month-on-month. The increase is due to the high fuel, commodities, and food prices.
  • Chart: 1-year inflation trend in India



The above chart shows how inflation has increased from the September 2021 low of 4.35% to the current April 2022 high of 7.79%.

How does high inflation affect stock markets?

  • The high prices of goods and services affect companies' profit margins that use them as raw materials in production. Low margins lead to low profits, thus affecting share prices negatively. Also, high inflation leads to the RBI hiking interest rates, making borrowing costs for corporates putting further pressure on profitability and thus negatively affecting share prices. Higher interest rates bring us to the second macro-economic indicator. So let us discuss it.

2. Interest rates

  • On 4th May 2022, the Reserve Bank of India (RBI) surprised most people by hiking interest rates in an off-cycle meeting. When inflation is higher than expected, the RBI increases interest rates, one of the monetary policy tools, to control inflation. The RBI hiked the repo rate by 40 basis points from 4.00% to 4.40%. The repo rate is when commercial banks borrow money from the RBI. The RBI also hiked the cash reserve ratio (CRR) by 50 basis points from 4.00% to 4.50%. The CRR is a specified percentage of the total deposits (collected from customers) that banks have to maintain with the RBI. The banks don’t earn any return on the CRR amount.



The above chart shows how the RBI reduced the interest rates during the Covid-19 pandemic to support economic growth. However, now that economic recovery is picking up, the RBI has turned its focus on controlling inflation higher than the RBI tolerance band of 2-6%.

How do higher interest rates affect the stock market?

  • The increase in interest rates increases the borrowing cost for corporates. The higher finance cost reduces the profitability of companies. The higher borrowing cost can also make some projects unviable. Thus, higher interest rates affect stock markets negatively. The RBI started with the first interest rate hike in May 2022. It may continue hiking interest rates and maintaining them at higher levels till inflation comes down within the tolerance levels. During this period, stock markets may get affected adversely.

3. GST Collections

  • The Goods and Services Tax (GST) is one of the most significant reforms introduced by the Government a few years back. However, after some initial hiccups, the GST collections are doing well. Recently, the collections have been better than the Government's estimates. As a result, the Government started the Financial Year 2022-23 with a big bang with April 2022 GST collection at Rs. 1.68 lakh crores, the highest ever in any month.
  • Chart: GST collection trend



The above chart shows how the GST collections have been consistently above the Rs. 1 lakh crore mark since July 2021, and in the last few months, the collections have gathered further momentum.

How do GST collections affect stock markets?

  • The Government’s higher GST collections are favourable for the stock markets. As the Government collects higher GST amounts, it will help the Government keep the fiscal deficit in check. In addition, the higher GST collections will allow the Government to reduce its borrowings from the debt markets. All these factors augur well for the stock markets.

4. GDP growth rate

  • The gross domestic product (GDP) measures the market value of all the goods and services produced in a country. Among the major economies, India's GDP is expected to grow at one of the fastest rates. The RBI has projected India's GDP growth rate at 7.8% for FY 2022-23. The higher the GDP rate, the better growth prospects for individuals in terms of jobs and careers, companies in terms of the market for selling goods and services, the Government in tax collections, etc.
  • Chart: India’s GDP growth forecasts



  • The above chart shows how most rating agencies and multilateral agencies such as World Bank and IMF had projected in January 2022 that India's GDP is expected to grow between 7.6% to 9.0%. However, with the Russia-Ukraine war breakout, increase in crude oil prices and other commodities, global inflation, and global interest rates, most forecasts are getting revised downwards. As a result, the RBI has also revised India's 2022-23 GDP growth forecast downwards from 7.8% to 7.2%.

How does the GDP growth rate affect stock markets?

  • As mentioned earlier, the higher the GDP growth rate, the better for individuals, corporates, and Government. Therefore, a higher GDP growth rate is suitable for stock markets. In addition, companies are expected to do well, resulting in better profitability, thus boosting share prices. However, the recent downward revisions in the GDP growth rate don't augur well for the stock markets. The downward revisions in the GDP growth rate would mean lower profitability for corporates, negatively impacting stock prices.

5. Trade Data

  • The trade data shows the difference between India's exports and what India imports. We can break down the trade data into two segments: merchandise trade and services trade. Traditionally, India's service exports have been more than imports, resulting in a surplus. Software exports are a significant contributor to service exports. However, in the case of merchandise, the imports have been more than exports resulting in a deficit. The crude oil and gold imports are significant contributors to merchandise imports. As a result, the merchandise trade deficit is higher than the service trade surplus, thus resulting in an overall trade deficit.
  • Chart: Trade data trend



The above chart shows how the merchandise trade deficit is higher than the service trade surplus, resulting in an overall trade deficit.

How does trade data impact stock markets?

  • We have seen above how India's overall imports are higher than overall exports, resulting in a trade deficit. A higher trade deficit puts pressure on the Indian currency (INR), resulting in depreciation. The Indian Rupee depreciation results in imports becoming even more expensive for us. A weaker currency can also lead to imported inflation and increased interest rates. All these factors are harmful to the stock market and can result in a fall in the stock market.
  • The Purchasing Managers Index (PMI) measures economic aThe segments: Manufacturing PMI and Services PMI. As the name suggests, the Manufacturing PMI measures the economic activity in the manufacturing sector. Similarly, the Services PMI measures the economic activity in the services sector.
  • Chart: Trends in the Manufacturing PMI and Services PMI



  • If the PMI index is above 50, the economic activity is expanding, which is good. The higher the number above 50, the better. Similarly, if the PMI index is below 50, it signifies the economic activity is contracting, which is not good. The more the number below 50, the worse.

How does PMI data impact stock markets?

  • If the PMI index is above 50 and the number is improving further regularly, economic activity is doing well. It means there is a growing demand for products and services, and companies can do well and improve their profitability, resulting in a boost for overall stock markets. Similarly, a PMI lower than 50 indicates that economic activity is contracting. It will lead to lower demand for goods and services. As a result, it will lead to lower sales and lower profitability for companies, which will result in overall stock markets going lower.

Macroeconomic Indicators are the Pulse of the Economy

In the above section, we have discussed various macro-economic indicators and how they impact the stock markets. Most macro-economic indicators are interlinked, and when they come together, they can impact the stock market significantly on either side. 

For example, as of May 2022, inflation is high in India and across the globe. It has led to RBI and other central banks increasing interest rates with more hikes coming in the future. Higher interest rates can lead to demand destruction resulting in a fall in the PMI index and lower GDP growth. Moreover, lower GDP growth can lead to lower GST collections for the Government. All these factors can lead to a fall in the overall stock market. Hence, it is said that macro-economic indicators are the pulse of the economy, and you should watch them to gauge in which direction the economy is moving.

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