Basic Relations between Equity, Debt and Currency markets

The bond, equity and currency markets of an economy move based on fiscal (GDP growth, fiscal deficit, CAD, etc.) and monetary policies (inflation, interest rates, etc.) in addition to global liquidity scenario and prevailing policies in other major economies. At a broad level, the following table holds true.

Quadrant

GDP Growth rate

Inflation rate

Yield rate Moves

Equity Indices Move

Currency

I

High

Low

Up

Up

Strengthens

II

Low

Low

Down

Sideways

Sideways/Weakens

III

High

High

Up

Up

Strengthens

IV

Low

High

Up/Stable

Sideways/Down

Weakens

A slump in economic growth can be tackled through 3 major avenues –

1. Fiscal policy – through a fiscal expansion (government spending)

2. Monetary policy – cutting benchmark interest rates, improving domestic liquidity in banking system

3. Currency – increasing exports and cutting back on imports

A big currency movement happens when transition occurs from one quadrant to another. Currency movement depends on the fiscal and monetary policies of the country. In case of contractionary fiscal policy and accommodative monetary policy, exchange rate will tend to be weak.

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