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The target behind Macro Economic targets!

, November 13, 2013, 2 Comments

macro economics marketexpressWhat does a target of an 8 percent growth of GDP mean for a layman?

Why does Sensex crossing the 20000 mark create an uproar?

Why an inflation target near 5 percent for Wpi for developing countries is a sought after figure?

Why Nifty crossing 6900 mark is another sought after feature?

Many more Macro Economic targets are frequently revised and reposted based on Exante and Expost calculations and they create a furore when they are released.The effect of those outcomes either brings the Sensex  soaring up or crashes it out like a thud!

Higher growth implies greater increase  in the market value of financial goods and services produced in a country in an accounting year.It also implies greater factor payments to the factors of production.Greater growth has an inherent tendency of increasing the inflation rate in the country due to the logic of too much money following too few goods.

Therefore, for the developing countries a target of inflation level of near 5 percent is seen as a tolerable limit to match the growth rates.When the growth in the country is high, then the stock markets also get in a boom phase.When the aggregate value of the 30 shares Sensex rises the 20000 mark, it’s a sign of boom in the market.

The companies under Sensex gain with the rise in the Sensex.With high growth, lower inflation, lower fiscal deficit and other better macro economic data credentials, the credit rating agencies rate the country as a whole on a better footnote which eventually attracts better Foreign Direct Investment and Foreign Institutional Investment in the country.

The positive externality achieved through the Foreign Direct Investment which has a lock-in period unlike Foreign Institutional Investment contributes to better technical expertise in the country too.Any excessive  volatility in the domestic interest rates, any negative news about the country which destabilizes the country creates a flight of Foreign Institutional Investment from the country in the form of flight of Hot money which again plummets the Sensex and Nifty.

When Sensex falls, people look for safer investments like Gold etc to lock their money in and too much demand for the same raises Gold prices.When the Central bank observes that people are locking their funds in Physical Assets like Gold etc then Central back often raises the Custom-Duty on the imported Gold so as to dissuade people to purchase excessive Gold.

In such a circumstance, greater is the savings of people in a bank, greater are the low cost Casa deposits with a bank to contribute to Money Creation by lending to Domestic Investors and increase further the Domestic Investment in the country.And eventually greater Domestic Investment in the country raises the growth rates further !

The Transmission Mechanism behind the Macro Economic Variables interconnections eventually impacts the layman some-time or the other and so no matter how much one tries to say what difference do such Macro Economic Data on Growth Rates etc have actually?

The individual by being a saver, investor and consumer or a producer is impacted by each small basis point increase or decrease on interest rate, or a small percentage fall or rise in the wpi or cpi or gdp deflator figures or the slightest fall or rise in the Export-Import figures impacting the Current Account Deficit or eventually impacting the Exchange-Rate in the country which raises or reduces the Dollar rate per barrel of Imported fuel !

Due to the globalization, any small change in the Macro Economic Data has a direct bearing on each Individual’s Disposable Per-Capita Income in the country….So if money in the pocket is important….as much important is the smallest change in the Macro Economic Variables…..To De-code future trends in future available money…

Info-graphics source : Universität Konstanz

  • P V Rajeev Sebastian

    Good article showing clarity of thought and understanding of macro economic concepts. Extremely well written

  • Ratika Datta

    Thank You!