Relation between Stock Market, Economic Growth and GDP

This essay discusses the relationship between stock market, economic growth and GDP. It explains how GDP affects the perception of investors and financial markets. It also explores the impact of economic indicators on the stock market in India.

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Contents
Introduction...........................................................................................................................................3
Relation between stock market, economic growth and the GDP...........................................................3
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7

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Introduction
To gain an understanding of GDP (Gross domestic product) is an important part that affect
the perception of investors because it affects the financial markets but in both the ways either
positively or negatively. After the age of globalisation and liberalisation, trading firms started
earning high corporate earnings because people started investing in financial and stock
market. A fall in GDP mean can low and reduce the pace of economic growth has been
weakening that can result into negative earning of the corporate. Whereas, GDP can have
opposite effect in such a way that rising GDP growth usually creates greater demand for
funds to serve the businesses but on the other side, it can be reason that high GDP is just
reflected due to increasing inflation that results into high interest rates that depreciates the
bond prices. On the other side, decreasing GDP means low rate of inflation as well as less
demand of borrowing and lending that indicates high bond price and low interest rates
(Srinivasan, 2014).
Relation between stock market, economic growth and the GDP
It is more than a century when the Indian stock market emerged. With the increasing and
diversifying economy, demand of capital have shown a significant increase due to
introduction of new ventures with their new product idea. The regulatory body renowned as
“SEBI” which act as a supervisor that companies do not engage unethical methods to raise
funds from investor. It keep a check on the operations of financial market. Whereas NSE and
BSE operates and provides a platform to interact with the investor (Fang, & You, 2014).
These two platforms provide an option to buyer to arbitrage and buy them form the site where
the prices are low after comparing (Carp, 2012). It is widely seen that development of share
market is an important factor that contributes to national growth in India (India Brand Equity
Foundation, 2018). GDP directly or indirectly reflects the personal disposable income of the
people. Moreover, it also increases the income of the people who shows their interest in

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investing their saving in the financial instruments or stock market. People interested in
establishing their stake and hold equity in the stock market do not return on the same day. It
takes time when more and more are attracted to the same stock and demand increases the
value of the stock. Enhanced or growing national economy provides a channel to divert and
encourage the mobilisation of savings (Carreras, Coibion, Gorodnichenko, & Wieland, 2016).
High GDP ensures improvement in the productivity of investing money by allocating the
capital resources. It increases the managerial discipline for the controlling the corporate. To
reflect the situation of stock market of India, the essay considers two metrics Nifty and
Sensex. While going through the data from yahoo finance the adjusted closing was around
10,322 in December 2017 and that have increased to 10,693 in December 2018 (Yahoo
finance, 2018). On the other hand, GDP (Gross domestic product) of India has been
increasing from to 6.5 to 7.5 percent in last four years from 2015 to 2018 (Yahoo finance,
2018). Moreover, the phase of demonetisation has led to decreasing GDP that further
decreased the payment of wages to the employees, which has reduced the GDP growth. The
capital market influences the economic growth. This has created the need of financial
instruments and on the same side; it increases the supply of services. Capital market increases
the savings and allocate savings to the more productive investments (Yahoo finance, 2018).
The three major stresses on reciprocal relation between economic growth and stock market.
Economic growth develops the financial system and establishes the efficient capital system
that drives the economy to grow (Ghosh, & Kanjilal, 2016). By pooling the funds, managing
the liquidity, effective allocation of resources, and diversifying the investment that increase
the productivity of any particular sector. Technological development is another advantageous
economies of scale that increase the size of the market. The impact of low stock price of
shares is not considerably very well. When the stock prices are low. It negatively affects the
GDP through the same channel because in this process employees and workers lose their jobs

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due to decreased profits earned by the company (Otieno, Ngugi, & Muriu, 2018). Moreover,
company starts cutting its cost by terminating employees. On the other hand, as GDP
increases above the consensus or the expectation of people (Rate, Price, Index, Chin, &
Othman, 2017). Companies start earning that will lead to bullish. If most businesses starts
reducing its liabilities and increase the profit on the same side, it will indicate that the
company is less dependent on outsider funds. In result of this, investor will gain a confidence
in stock market because people will start trusting the company. Increasing inflation rate can
lead to decreasing purchasing power of customers because a person will need a certain sum
just to meet its basic consumption level (Syriopoulos, Makram, & Boubaker, 2015). If basic
goods becomes expensive, he will not be able to save anything leading to no investment in
the stock market. Moreover, GDP is adjusted according to the inflation rate. For example- if
GDP is calculated as 6 percent higher as compared to last year but on the same side the
inflation rate is measured 2 percent. Then, GDP growth will be reported as 4 percent (Geetha,
Mohidin, Chandran, and Chong, 2018).
There always lies a relationship between inflation, other economic indicators, and stock
market. As inflation increases, the purchasing power of the consumers’ decrease. Same as
dividend-paying stocks affected by inflation, which is very similar to the way interest rates
affects the bond borrowing. With the increase in inflation, profit of the company shows a hike
in profits. Income and dividend derived from stock prices decreases (Sameer, 2017). Other
more factors affect the operation of stock market such as fiscal deficit, credit deposit ratio,
money supply, and C/D ratio. Integration of capital market in Asia has been growing and it is
due to economic reforms especially when it comes to financial sector. The awareness among
the Indian population regarding the stock market is still not very popular (Fang, & You,
2014). Apart from economic indicators, other factors influencing the stock market are
macroeconomic, political, general business conditions, and social variables. Volatility in the

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prices of stock market is affected by trading volume, floats, arrival of new stock and
information regarding rules and regulations imposed by SEBI for the smooth running of stock
market (Foreign exchange market, 2018). Less volatile is preferred when it reduces the
unimportant risk tolerated by investors then it enables the stock market traders to liquefy their
assets without much changes in asset prices. It is necessary to assess the volatility because
high risk can adversely affect and hamper the investors. In order to prevent the high
fluctuating stock in the market because it is important to protect the interest of investors by
using parameters in financial applications, asset management and from derivation valuation
to risk management. According to India Brand Equity Foundation, (2018), it is seen that in
order to expand and promote businesses in India, company has undertaken mergers and
acquisitions that have reached US$74.8 billion in August 2018. Moreover, it is seen in the
same report that companies have raised approximately US$ 2.88 billion either by processing
IPO (initial public offer). The World Bank report has revealed that the amount of private
investment has shown a growth in India by 8.8 percent (Yahoo finance, 2018).
Conclusion
Stock market in India was introduced after independence and it mitigates the risk that actually
was high in barter system and other traditional system. The relevance of economic indicators
affects the stock market to high extent. Higher GDP (Gross domestic product) attract and
pool number of small investments into the stock market. Moreover, stock market is suitable
for investment through a common person. It offers an opportunity for a common person to
invest in diversified portfolio at a very relative cost. From the above essay, it is seen that
India has become a good market to invest as the government itself allows the FDI in the
country.

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References
Carp, L., (2012). Can Stock Market Development Boost Economic Growth? Empirical
Evidence from Emerging Markets in Central and Eastern Europe. Procedia Economics and
Finance, Elsevier, 3(1), 438-444.
Carreras, M. D., Coibion, O., Gorodnichenko, Y., & Wieland, J. (2016). Infrequent but long-
lived zero-bound episodes and the optimal rate of inflation. Annual Review of
Economics, 8(1).
Fang, C. R., & You, S. Y. (2014). The impact of oil price shocks on the large emerging
countries' stock prices: Evidence from China, India and Russia. International Review of
Economics & Finance, 29, 330-338.
Foreign exchange market, (2018). Why Understanding GDP Is Crucial For Investors.
Retrieved from: https://www.fxcm.com/insights/why-understanding-gdp-is-crucial-for-
investors/
Geetha, c., Mohidin, r., Chandran, v. v., and Chong, v. (2018). The relationship between
inflation and stock market: evidence from malaysia, united states and china. International
journal of economics & management sciences, 9(24), 1947-1959.
Ghosh, S., & Kanjilal, K. (2016). Co-movement of international crude oil price and Indian
stock market: Evidences from nonlinear cointegration tests. Energy Economics, 53, 111-117.
India Brand Equity Foundation, (2018). ABOUT INDIAN ECONOMY GROWTH RATE &
STATISTICS. Retrieved from: https://www.ibef.org/economy/indian-economy-overview

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Otieno, D. A., Ngugi, R. W., & Muriu, P. W. (2018). The impact of inflation rate on stock
market returns: evidence from Kenya. Journal of Economics and Finance, 1-18.
Rate, I., Price, C. O., Index, K. L. C. I., Chin, L. L., & Othman, N. S. (2017). The
Relationship Between Gross Domestic Product. Journal of Engineering and Applied
Sciences, 12(6), 1393-1400.
Sameer, Y. (2017). STOCK MARKET VOLATILITY - A STUDY OF INDIAN STOCK
MARKET. Research gate, 23(4), pp.61-73.
Srinivasan, P. (2014). Stock Market Development and Economic growth in India: An
Empirical Analysis. Retrieved from:
https://mpra.ub.uni-muenchen.de/55657/1/MPRA_paper_55657.pdf
Syriopoulos, T., Makram, B., & Boubaker, A. (2015). Stock market volatility spillovers and
portfolio hedging: BRICS and the financial crisis. International Review of Financial
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Yahoo finance, (2018). Nifty50. Retrieved from: https://finance.yahoo.com/quote/%5Ensei?
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