[‘Daily News Updates’ will provide you with a simplified understanding of the important economic/financial events across the country]
India’s Market Capitalisation to GDP Ratio Hits a Decadal High
India’s market capitalisation to GDP ratio hit a decadal-high of 103.47% as of March 31, suggesting that the equities are valued expensively because the market expects a recovery soon. At the end of FY-21, the market cap of all listed companies stood at Rs. 204.31 trillion while the nominal GDP growth (i.e., expressed in current year prices) declined by 3 % to Rs. 197.45 trillion in the last fiscal. Since the ratio is much lower than its peak in 2007 (during the Global Financial Crisis), experts are not worried about the valuation yet and do not think it is a bubble.
[What is Market Capitalisation? Market capitalisation represents the valuation of a company. It is determined by multiplying the price of their stocks with the number of shares issued by that company. Market capitalisation = price * quantity]
[Read about the 2008 Financial Crisis]
Huge Job Losses in the Months of April and May Raises Concerns
About 15.3 million Indians lost their jobs in May. The number of people employed fell to 375.45 million in May from 390.79 million in April, according to the Centre for Monitoring Indian Economy (CMIE). As per economists, job losses will push people into poverty, reduce savings and delay the demand revival.
RBI’s Monetary Policy Committee to Meet on 2nd-4th June, 2021
The RBI’s Monetary Policy Committee (MPC) is set to meet on 2nd-4th June, 2021. The main task of the MPC is influencing interest rates using various instruments (like Repo Rate, Reverse Repo Rate, etc.) and keeping inflation in check. It must be noted that the Consumer Price Index (CPI) was 4.3 % in April 2021 (well within the range set by the MPC). However, the Wholesale Price Index (WPI) [This index measures the price level of goods traded in the wholesale market] increased to 10.49%. The MPC will assess whether the trend in WPI has spilled over to the CPI. It is expected that the MPC will not change the rates/go for inflation targeting as it can adversely impact the ongoing economic revival after the decline in daily COVID-19 cases.
[What is the objective of the MPC? The main objective of the Monetary Policy Committee is to maintain the inflation target set up by the Central Government, in consultation with the RBI, every five years. The current inflation target till March 31, 2021, is 4 % within a band of +/- 2 %. Hence, the upper limit of 6 %, and the lower limit is 2 %.]
[Let me explain how inflation can be controlled by the MPC by using the example of Repo Rate. You can refer to this article for an overview of the measures available at the MPC’s disposal for inflation targeting.
Repo rate is the rate at which a bank borrows from the RBI against the collateral of Government securities. This borrowing is on an overnight basis. To illustrate, if a bank wants to borrow money from RBI, it sells government securities to the RBI. The bank makes an agreement with the RBI to repurchase these securities later at a predetermined rate. The interest rate charged on such borrowings is the Repo rate. If this rate increases, it becomes expensive to borrow from the RBI. Therefore, banks increase their lending rates. Hence, lending activities decline. (Repo rate ↑ ⇒ money supply ↓). When the money supply declines, inflation can be successfully arrested].
[What is Consumer Price Index? Consumer Price Index is the weighted average of the prices of selected goods and services consumed by people. It is also called the retail price index. The basket includes those goods and services in the retail market, which are representative of expenditure by a typical consumer. It is used for measuring inflation in India].
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