Financial Ratios and Monetary Policies Impact on Indian Stock Prices

This report delves into the relationship between financial ratios and the trends observed in the Indian stock market. It begins by defining financial indicators and their role in estimating stock prices, emphasizing their importance in assessing profitability and market vulnerability. The report then outlines key financial ratios, including Price to Earnings (P/E), Price to Book Value, Debt to Equity, Operating Profit Margin, Return on Equity, and Interest Coverage Ratio, explaining how each ratio provides insights into a company's valuation, leverage, and operational efficiency. Furthermore, the report examines the impact of monetary policies, such as repo rate, reverse repo rate, cash reserve ratio, and statutory liquidity ratio, implemented by the Reserve Bank of India on stock prices. The report concludes by providing a list of references for further study. This assignment, available on Desklib, offers a comprehensive overview of financial ratios and their significance in understanding the dynamics of the Indian stock market.

Financial Ratios as an
indicator of the Indian
Stock Prices
- A study into the relationship between the
financial ratios and the trends in the Stock
Market

What are Financial Indicators?
• The financial indicators refer to the essential financial
metrics that give an idea about the trends of the financial
market for which they are used
• The financial indicators give an estimate of the stock
prices that might go up or down
• With the help of the financial indicators, the investor gets
an idea about the profitability and the other aspects of the
stock like vulnerability to the market fluctuations and
other related issues

Financial Ratios
Here is a list of the financial ratios that help in understanding the
trends and performances of the listed entities:
• Price To Earnings Ratio
• Price To Book Value Ratio
• Debt to Equity Ratio
• Operating Profit Margin
• Return on Equity
• Interest Coverage Ratio

Price to Earnings & Price to Book
Value Ratio
• The price to earnings ratio reveals the amount of stock, for which the
investors are making a payment, for each rupee of earnings.
• The price to earning ratio reveals the essential factor whether the market
is undervaluing or overvaluing the company.
• The price to book value ratio is the ratio that results in the comparison of
the market price of the stock to the book value of the stock of the
corporate entity.
• The comparison to the book value is essential as it reveals whether the
corporate entity will be able to repay the liabilities of the assets of the
company are liquidated

Debt To Equity Ratio & Operating
Profit Margin
• The debt to equity ratio reveals the degree to which a corporate
entity has been leveraged.
• This means that the proportion of the debt that has been involved in
the business capital along with equity is measured with the help of
this ratio.
• A low Debt to Equity ratio is considered better.
• The Operating Profit margin reveals the pricing power and the
operational efficiency.
• A higher Operating Profit Margin is considered better

Return on Equity and Interest
Coverage Ratio
• The return on equity is an essential financial indicator that measures the
amount of return that the shareholders of the corporate entity are able to
derive from the business and total earnings.
• The Return on Equity ratio is utilized for the comparison of the profitability of
the different corporate entities belonging to the same industry.
• The Interest Coverage ratio measures the degree of solvency of a business
• This means that the interest coverage ratio reveals the number of interest
payments that the business will be able to service on the basis of its
operations

Monetary policies and its impact on
the Indian Stock Prices
• The monetary policies play an important role in
influencing the stocks markets. In India the required
modifications or the introduction of the monetary policies
is carried out by the Reserve Bank of India.
• With the Reserve Bank of India announcing credit policies
the price of the stocks are likely to rise or fall

Monetary policies and its impact on
the Indian Stock Prices
The list of monetary policies that has affected the stock prices in India are as
follows:
• Repo rate – the decrease in the repo rate result in the rise of the stock
prices
• Reverse Repo rate – the increase in the reverse repo rate result in the fall
of the stock prices
• Cash Reserve ratio - the decrease in the repo rate result in the rise of the
stock prices
• Statutory Liquidity ratio - the decrease in the repo rate result in the rise of
the stock prices

References
• Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J.,
2018. An Introduction to Management Science: Quantitative Approach.
Cengage learning.
• Boyd, J.H. and Heitz, A., 2016. The social costs and benefits of too-big-to-fail
banks: A “bounding” exercise. Journal of Banking & Finance, 68, pp.251-265.
• Daniilidis, A., Herber, R. and Vermaas, D.A., 2014. Upscale potential and
financial feasibility of a reverse electrodialysis power plant. Applied
energy, 119, pp.257-265.
• Flannery, M.J., 2016. Stabilizing large financial institutions with contingent
capital certificates. Quarterly Journal of Finance, 6(02), p.1650006.

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