Syllabus

UNIT-II
Fundamental analysis: Economy analysis: EIC analysis: Leading
lagging & coincident indicators. Expected direction of movement
of stock prices with macroeconomic variable in the Indian context-
GDP growth rate, index of industrial production, fiscal deficit, price
indices, savings &investment, Monsoon, Fiscal and monetary
policies, expert opinions etc.
Industry analysis: different stages of industry life cycle, M. porter’s
five forces model, SWOT analysis and other relevant specific
industry analysis.
Company analysis- both financial and non financial analysis
Term Paper – from this unit- There is a lot to learn
Divide class into groups of 4. In each section
Two groups can study the economy – trends for past 5 years and
expected / forecasted movements in the coming year.
Four groups can study specific Industries for which information is
available freely- again past trends and forecasts for the future.
Remaining groups can take one stock each from the BSE Sensex.
and do company analysis – past trends and projections.
Economy- macroeconomic variables including GDP, IIP, deficit,
stock indices, savings and investment , Fiscal and monetary policy
, surveys etc….
Industry analysis: which stage of industry life cycle, M. porter’s five
forces model, SWOT analysis and any other relevant specific
industry analysis.
Company analysis- both financial and non financial analysis as
may be publically available
 Fundamental Analysis
Empirical studies show that stock prices are
influenced by macroeconomic, industry and
company specific variables.
•King- 50% market factor, 10% industry factor
•Macroeconomic factors studied include-money
supply, interest rates, inflation

E-I-C Analysis - Top down approach

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When the economy is booming
• most industries and companies do well
• investors are optimistic- willing to invest
Long run economic prospects depend on
•Capital, labour and productivity
•Govt. policies for investment and technology
•Population consumption and savings pattern
Short run economic activity fluctuates due to
•Demand/supply, inflation, interest rates etc.
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History -Economic planning in India
• Five year plans
• Annual budgets – Govt. policy signals
through taxes and expenditure
• Monetary policy-money supply & interest
Focus of eleventh 5 year plan (2007-2012)
• Inclusive growth through poverty reduction
• Education, health
• Women and children
• Village infrastructure
(these will have to be a part of any policy)
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Emphasis since BJP Government took over
Make in India, Skill India, Entrepreneurship, Social
advancement…….Some things in focus :
Swatch Bharat- toilets, drinking water
Financial Inclusion- Jan Dhan and Jan Suraksha
Remove corruption and black money- direct transfer
of subsidies and stringent punishment
Infrastructure- roads, electricity incl renewable
energy, medical facilities, schools, irrigation
MUDRA Bank – Micro Units Development
Refinance Agency

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 Economic Indicators
• Pro cyclic- GDP
• Counter cyclic – unemployment
Leading – rainfall, capital investment,
interest rates, confidence surveys
• Lagging- inventory pile up, overdue debt,
unemployment
• Coincident- GNP, production index, money
market interest, stock index
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 Variables used to Forecast
Direction of Indian Economy
• GDP- most comprehensive. estimates from
(earlier CSO ) now MOSPI Ministry of
statistics and program implementation
available in 2 months revised over 2-3 years
• IIP-quick estimates available in 6 weeks,
revised after 2 months
• Savings and investment rate
• Fiscal deficit-problem if too high
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• WPI (preferred earlier) and CPI (preferred
now) mild inflation good but too high
harmful
• Rainfall – food and raw material
• International developments- impact trade,
exports, FDI and portfolio investments
• Central and state Govt. Budgets
• Economic Survey – state of economy and
recommendations for future policy

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• Monetary Policy, April & quarterly review
• Articles in journals, newspapers
• Consumer surveys
• Business confidence surveys
• Expert opinions

Forecasts depend on the quality and

timeliness of information.
As new information becomes available,
forecasts need to be revised
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 Budget every year
Macro-economic framework statement
All items taken vs previous year
• Growth GDP
• capital formation
• Good food grain production ?
• IIP
• Inflation , monetary policy-CRR and repo
rates
• Any global indicators ? Trends- pointers
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• Exports Imports growth, Trade deficit
• Net inflow/outflow of portfolio investments
• Rupee depreciation/ appreciation vs Dollar
• FDI compared to previous year

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 Survey of Professional Forecasters Sept 2015
Table 1: Median Forecast of macro-economic indicators for 2015-16 and 2016-17
Indicator 2015-16 2016-17
1. Real GVA at basic prices (growth rate in per cent) 7.4 8
1.1. Agriculture & Allied Activities (growth rate in per cent) 1.5 3
1.2. Industry (growth rate in per cent) 6.7 7.2
1.3. Services (growth rate in per cent) 9.4 9.8
2. Money Supply (M3) 12 13.5
3. Bank Credit 12.5 14.2
4. Combined Gross Fiscal Deficit (per cent of GDP) 6.3 6
5. Central Govt. Fiscal Deficit (per cent of GDP) 3.9 3.6
6. Export (growth rate in per cent) -4.6 6.5
7. Import (growth rate in per cent) -4.1 7.1
8. Trade Balance (as per cent of GDP) -6.5 -6.6
9. Net Invisible (US Dollar) 119 122.9
10. Current Account Balance (per cent of GDP) -1.1 -1.3
Source RBI Bulletin
GVA Gross Value Added M3- slide at end Invisibles services, income and transfers( not eco activity)
Current A/c Balance Goods and services, not capital flows incl balance of trade , invest incomes. Cash transfers
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Many sources of information – you need to come to your own conclusion

Table 73: Projections of Real GDP for India by Various Agencies – 2009-10

(Per cent)
Agency Latest Projection Month of Projection 
Overall Agriculture Industry Services
Growth
1 2 3 4 5 6
ADB* 5 - Mar-09
ASSOCH 6.5 - - - Dec-08
AM
JP 6.2 - - - Nov-08
Morgan
CRISIL 6.1 3 4.5 7.7 Feb-09
EAC to 7.0-7.5 - - - Jan-09
PM
Merrill 5.3 2.7 3.3 6.7 Mar-09
Lynch
Citigroup 5.5 - Mar-09
CMIE 6.6 - Apr-09
NCAER 6.9 2.7 6.6 8.4 Jan-09
OECD 4.3 - Mar-09
UNCTAD* 7 - - - Jan-09
IMF 5.25 - Mar-09
World 4 - Mar-09
Bank
ICRIER 4.8-5.5 - Mar-09
Range 4.0-7.5 2.7-3.0 3.3-6.6 6.7-8.4
* : Calendar year.

Source RBI

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 Business Expectations Surveys
Organisation Business Expectations Growth over a Growth over
year ago previous round
Period Index (per cent) (per cent)
1 2 3 4 5
NCAER November 2008- Business -40.6 -23.8
January 2009 Confidence Index
CII October 2008- Business -15.1 -7.7
March 2009 Confidence Index
Dun & Bradstreet April-June 2009 Business -39 -2
Optimism Index

Source RBI

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 Monetary Policy April
• RBI repo rate (charged for lending to banks) and
Reverse repo rate (paid on deposits from banks)
• CRR, SLR, Bank Rate
• Moral suation

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M1: Currency with the public + Deposit money of the public
(Demand deposits with the banking system + ‘Other’ deposits
with the RBI).
M2: M1 + Savings deposits with Post office savings banks.
M3: (Broad concept of money supply)M1+ Time deposits with
the banking system = Net bank credit to the Government + Bank
credit to the commercial sector + Net foreign exchange assets of
the banking sector + Government’s currency liabilities to the
public – Net non-monetary liabilities of the banking sector (Other
than Time Deposits).

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