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.