Wealthy Wednesdays: Economic expressions you must know

Wednesday, 28 May 2014 - 6:56pm IST | Place: Mumbai | Agency: DNA
Don't let these terms daunt you anymore. Make them your new buddies and understand how these economic terms influence the changes in the prices of your household commodities and your investments
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Volatility in any market is inevitable and very often it can surprise the most experienced traders as well.

Certain economic factors are bound to influence the markets and its awareness can help us be more prepared for the markets reactions.

WPI and CPI– Inflation Indicators
Investopedia definition- An index that measures and tracks the changes in price of goods in the stages before the retail level. Wholesale price indexes (WPIs) report monthly to show the average price changes of goods sold in bulk, and they are a group of the indicators that follow growth in the economy.

The Wholesale Price Index (WPI), announced on a monthly basis, is the key indicator of inflation in India. It represents a basket of wholesale goods and services, which are exchanged by corporates in India and indicates the level of price change in the industrial, manufacturing and construction sector.

Investopedia definition: A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Consumer Price Index (CPI), on the other hand, represents the retail basket purchased by consumers. Both these indicators together represent the Inflation level in the country.

Gone are the days when the household budget could be managed in less than a thousand bucks. Inflation is certainly inevitable and is also essential in moderation to ensure that the economy grows at a decent pace. But when the inflation spikes at the risk of affecting the economy adversely it needs to be restrained. At the same time very low inflation or deflation is also unacceptable. A case where inflation is high could result in the lower purchasing power of consumers, higher input costs for producers and it could erode profitability of firms. Hence, the central bank and the government intervene by using monetary and fiscal policy measures to help control inflation at suitable levels.

Market pundits estimate this figure and track its announcement closely. Ideally the markets will react adversely when WPI rises at a greater pace.

IIP – Growth Indicator
Investorwords definition: A key economic indicator that measures real output from the manufacturing, mining, and utilities industries. Used along with other indicators such as capacity utilisation and employment data to forecast economic growth

Index of Industrial Production (IIP) is the main indicator used to derive the growth of the different sectors in India.
It is announced on a monthly basis and is keenly awaited by all market participants. Traders spend sleepless nights in anticipation of this number. Does it really influence the markets that much? Of course it does! Expect a sell-off in your stock prices in reaction to a negative IIP number especially if it surprises the market expectations by a huge margin.

An increase or decrease in this number signifies the level of industrial activity in the country. This again triggers action from the central bank and the government as they would like to maintain a healthy growth in the industrial activities.

Investopedia definition: The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

By definition it is the market value of all good s and services produced in a country in a given period of time.

GDP as an indicator is used to understand the level of growth in a country and is often used as a statistical tool to compare peer group nations.

It is announced on a quarterly basis, and a good GDP data would fuel the stock markets to rally. Higher GDP would ideally indicate better returns on your investment. However there are times when the market could react differently, as anticipations of future business environment could vary.

Repo Rate
Business Dictionary definition: The discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system To temporarily expand the money supply, the central bank decreases repo rates. To contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate. Repo is short for repossession.

Sluggish growth, Stubborn Inflation, staggering economy, recessionary trend and more–the central bank tackles these economic evils by effectively managing its monetary policy tools vis. the Repo rate. It is nothing, but the rate at which the central bank provides liquidity to commercial Banks. The RBI being the last resort banker to Banks lends money and borrows their surplus on a daily basis via its LAF corridor.

The repo rate is hiked signalling higher interest rate to curb inflationary pressures while, the rates are eased when inflation eases. Similarly, the RBI can also use this tool to stimulate growth in the economy by cutting rates.


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