An enviable outlier

Currently, the sale of shares is underway in the stock markets of almost all developed countries, including the USA. Along with ups and downs, the stock market is also experiencing a fluctuation. Due to the corona pandemic, geopolitical crises, the ongoing war between Russia and Ukraine, and the high price of crude oil in the international market, the condition of the stock market in developed countries is not favourable. The global economy also remains dismal, with the possibility of a recession in some countries. In contrast, the Indian stock market has been booming for the past few months. On June 21, the Sensex closed at a record high of 63,588, gaining 261 points, and earlier on December 1, 2022, it closed at 63,523, gaining 195 points. Now, on June 28, the Sensex crossed the 64,000 mark. According to experts, the Sensex can reach the level of 70,000 by the end of this year.

Although the Nifty couldn't reach its highest level of 18,887 on June 21, it remained close to the all-time high of 18,640. Then, on June 28, it crossed the 19,000 level. Experts predict that the Nifty can reach the level of 21,000 by the end of this year. Due to the stock market boom, the wealth of stock market investors has increased by Rs 40 lakh crore in the last 3 months. Moreover, it is said that the Indian economy will grow from 3 trillion to 5 trillion by the year 2025. In a recent report by HSBC, it has been stated that the Indian economy will reach 7 trillion in the next 5 to 10 years. Therefore, the current environment is favourable for investing in India, and both domestic institutional and foreign direct investment (FDI) can take advantage of this opportunity.

The Indian economy is also in a state of recovery, with the Gross Domestic Product (GDP) showing improvement. In the last quarter of the financial year 2022-23, the GDP was estimated to be 4.2 percent, but it turned out to be 6.1 percent. This improvement in the GDP growth rate in the fourth quarter of the financial year 2022-23 has also positively affected the growth rate for the entire financial year. The Monetary Policy Committee (MPC) had predicted a 6.8 percent GDP for the first financial year 2022-23, but it turned out to be 7.2 percent.

What is the stock market?

To understand the fluctuations in the stock market, it is necessary to grasp its operations. A share represents a stake in an asset or a company. Shares of listed companies in the stock market are bought and sold with the assistance of a stockbroker. Nowadays, due to the digitization of share trading, stockbrokers are no longer required. Any investor can independently buy and sell shares through a smartphone. In India, the two major stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Additionally, bonds, mutual funds, and derivatives are also traded in the stock market.

Meaning of buying shares

When a listed company aims to raise capital, it issues shares. Investors purchase shares according to the company's offering. The more shares an investor buys, the greater their ownership in the company. The company determines how many shares to allocate to individuals or groups upon issuance. Investors can sell their shares at any time in the stock market with the assistance of a broker or independently. Brokers charge a fee for their services, or investors may incur fees even when buying and selling shares online themselves.

Getting a company listed

To list a company in the stock market, it must enter into a written agreement with the stock exchange. The company then submits the required documents to SEBI, which are examined by SEBI. If the information is verified and accurate, the company is listed on either the BSE or NSE, depending on the application. Furthermore, the company is obligated to provide SEBI with periodic updates on its financial activities to safeguard the interests of investors.

Fluctuations in share prices

The price of shares fluctuates on a daily basis due to various factors such as the company's performance evaluation, the receipt of orders, profit fluctuations, levels of import or export, factory shutdowns, changes in production levels, marketing efforts for finished goods, and so on. These factors can have a positive or negative impact on the company, thus influencing the share prices.

SEBI as the regulator

The Securities and Exchange Board of India (SEBI) serves as the regulator of the stock market, responsible for monitoring the activities of listed companies. If a listed company violates the agreement, SEBI can delist it from the BSE or NSE. Additionally, SEBI's role includes regulating brokers who manipulate share prices. In the past, a notable stockbroker named Harshad Mehta orchestrated a major scam by artificially inflating share prices.

Effect of weak rupee on the stock market

When the Indian rupee weakens against the US dollar, it becomes more expensive for Indian companies to import goods. For instance, goods worth Rs. 100 may now cost Rs. 105 or Rs. 110. Since India heavily relies on imports to meet its requirements, companies incur higher costs when importing raw materials or finished goods. This, in turn, leads to a decline in the stock price of the company during challenging economic conditions.

The value of the rupee against the dollar is determined by demand and supply, influenced by imports and exports. If a country exports more than it imports, it accumulates larger foreign exchange reserves. However, since India imports more than it exports, its foreign exchange reserves are always limited. Consequently, the rupee remains weak compared to the dollar.

The dollar is an international currency widely used by many countries, making it the strongest currency in the world. As a result, international trade transactions are often conducted in dollars.

The rupee weakens even when foreign exchange reserves are low. For instance, if India has a currency reserve of USD 100 but needs to buy or import goods worth USD 110, it must spend extra money to acquire the additional USD 10 from the market, leading to rupee depreciation.

Conclusion

In the stock market, both domestic and foreign investors invest in companies by purchasing shares, hoping for higher returns. However, due to a lack of understanding of the economy, inadequate analysis of a company's financial statements, or various economic and political factors, investors may incur losses. Therefore, caution and close monitoring of listed companies' activities in the stock market are crucial for investors.

Fluctuations in share prices not only impact investors but also have a negative effect on the country's economy. Selling by foreign investors reduces foreign direct investment (FDI), which is vital for India's economic development. A decline in FDI can further slow down India's already sluggish growth rate. Moreover, reduced FDI leads to a decrease in employment opportunities and adversely affects overall economic activities.

Views expressed are personal