Assignment 2

Situation 1 - GoI announces start of vaccination for the age group 2-18 in the month of July

Analysis - If the children of the age group 2-18 start getting vaccinated then it is highly likely
that people would be less apprehensive to take their children out and the government
would also reduce restrictions in the locked states. This would lead to a positive sentiment
in the equity markets. People would be back in business leading to more capital generation,
the demand would increase again for goods and services eventually leading to hike in equity
market prices more specifically in the food industry, travel industry (airlines and hotels),
leisure industry.

Situation 2 - A global investment bank decreases India's real GDP forecast, and at the same
time, IIP results are stellar. (IIP: Index of Industrial Production)

Analysis – Given that the IIP results are stellar, there is a possibility of the industrial market
leaders’ prices going up. The large cap companies would see a hike in their prices. But since
a global investment bank has forecasted a decrease in the GDP, it would lead to foreign
investors pulling out their investments from the Indian market which would be
compensated by the Indian leaders in the long run. Also, there is a possibility that the retail
investors pull out their money too because the IB forecast would be shown in the news but
not the IIP results, which is what drives retail investors. But this should not have a significant
impact on the equity prices.

Situation 3 - Due to Covid 2nd wave, a lot of medium and small sized companies got
affected, but leaders became more stronger with increased market share. (NIFTY consists of
market leaders)

Analysis – MSMEs and SMEs lost a lot of capital and some might also have filed for
bankruptcy during the second wave. But since the market leaders became even stronger,
their market cap must have increased and their stock prices too. NIFTY consists of market
leaders so it’s pretty intuitive that the index would have also soared.

Situation 4 - RBI announces a series of liquidity infusions by purchasing open market

securities for the month of June

Analysis – Liquidity infusion would increase the money supply in the economy which in turn
would lead to an increase in the aggregate demand in the market. This would lead to
soaring equity prices.

Situation 5 - RBI announces Bitcoin as a legal tender of exchange from July 1, 2021

Analysis – The equity market prices would sink. Announcing Bitcoin as a legal tender would
lead to increase in Bitcoin prices and big businessmen might want to pull out some of their
money from Indian equity market and invest it in Bitcoin given its higher rate of returns.
Indian people are very excited about Bitcoin already, making it legal would only help them
invest in that more. In the long run, equity prices would be back to normal when the hype
about Bitcoin settles.

Situation 6 - RBI MPC announces repo rate increase by 25bps in July, for the first time after
5 quarters of keeping repo rate at all-time low.

Analysis – When the repo rate increases, the lending power of the banks decreases. This in
turn leads to decrease in the money supply in the economy, decrease in aggregate demand
and sinking equity market.